KT Corporation Separate Financial Statements December 31, 2017 and 2016 KT Corporation Index December 31, 2017 and 2016
Page(s)
Independent Auditor’s Report .…………………………………………………....…...... 1 – 2
Separate Financial Statements
Statements of Financial Position …………………………………………………...………...... 3 – 4
Statements of Profit or Loss ………………………………………...………...... …………… 5
Statements of Comprehensive Income ……………………………………...... ……………… 6
Statements of Changes in Equity …………………………………………………..………...... 7
Statements of Cash Flows …………………………………………………………………...... 8
Notes to the Separate Financial Statements .……………………………………...... 9 – 92
Report of Independent Accountants’ Review of Internal Accounting Control System 93 – 94
Report on the Assessment of Internal Accounting Control System ……………………. 95 Independent Auditor’s Report
(English Translation of a Report Originally Issued in Korean)
To the Board of Directors and Shareholders of KT Corporation
We have audited the accompanying separate financial statements of KT Corporation (the Company), which comprise the separate statements of financial position as of December 31, 2017 and 2016, and the separate statements of profit or loss, separate statements of comprehensive income, separate statements of changes in equity and separate statements of cash flows for the years then ended, and notes to the separate financial statements, including a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the financial statements Management is responsible for the preparation and fair presentation of the separate financial statements in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility Our responsibility is to express an opinion on the separate financial statements based on our audits. We conducted our audits in accordance with Korean Standards on Auditing. Those standards require that we comply with ethical requirements, and plan and perform the audit to obtain reasonable assurance about whether the separate financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the separate financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the separate financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the separate financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the separate financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the accompanying separate financial statements present fairly, in all material respects, the separate financial position of KT Corporation as of December 31, 2017 and 2016, and its separate financial performance and its separate cash flows for the years then ended in accordance with Korean IFRS.
Auditing standards and their application in practice vary among countries. The procedures and practices used in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries.
Seoul,Korea March 2, 2018
This report is effective as of March 2, 2018, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying separate financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any.
2 KT Corporation Separate Statements of Financial Position December 31, 2017 and 2016
(in millions of Korean won) Notes 2017 2016
Assets
Current assets Cash and cash equivalents 4, 5 ₩ 1,166,402 ₩ 1,602,397 Trade and other receivables, net 4, 6 2,740,314 2,590,161 Other financial assets 4, 7 54,774 289,613 Inventories, net 8 232,246 178,096 Current income tax asset 29 7,847 - Current assets held for sale 13 2,772 - Other current assets 9 175,213 190,812 Total current assets 4,379,568 4,851,079
Non-current assets Trade and other receivables, net 4, 6 735,671 622,045 Other financial assets 4, 7 75,896 198,777 Property and equipment, net 10, 20 11,375,047 11,961,193 Investment properties, net 11 633,851 662,985 Intangible assets, net 12 2,100,215 2,337,549 Investments in subsidiaries, 13 3,584,978 3,638,856 associates and joint ventures Deferred income tax assets 29 421,745 401,346 Other non-current assets 9 27,952 26,507 Total non-current assets 18,955,355 19,849,258 Total assets ₩ 23,334,923 ₩ 24,700,337
3 KT Corporation Separate Statements of Financial Position December 31, 2017 and 2016
(in millions of Korean won) Notes 20162017
Liabilities
Current liabilities Trade and other payables 4, 14 ₩ 4,109,524 ₩ 4,181,092 Borrowings 4, 15 1,298,534 1,608,064 Other financial liabilities 4, 7 33,106 - Current income tax liabilities 29 - 22,551 Provisions 16 67,480 92,007 Deferred income 11,295 29,298 Other current liabilities 9 76,728 94,659 Total current liabilities 5,596,667 6,027,671
Non-current liabilities Trade and other payables 4, 14 958,189 1,135,738 Borrowings 4, 15 4,914,400 5,960,983 Other financial liabilities 4, 7 53,145 13,386 Net defined benefit liabilities 17 302,319 284,931 Provisions 16 93,920 92,388 Deferred income 85,713 79,416 Other non-current liabilities 9 19,492 21,305 Total non-current liabilities 6,427,178 7,588,147 Total liabilities 12,023,845 13,615,818
Equity Share capital 21 1,564,499 1,564,499 Share premium 1,440,258 1,440,258 Retained earnings 22 9,344,506 9,156,204 Accumulated other comprehensive income 23 (1,502) (32,091) Other components of equity 23 (1,036,683) (1,044,351) Total equity 11,311,078 11,084,519 Total liabilities and equity ₩ 23,334,923 ₩ 24,700,337
The above separate financial statements of financial position should be read in conjunction with the accompanying notes.
4 KT Corporation Separate Statements of Profit of Loss Years Ended December 31, 2017 and 2016
(in millions of Korean won, except per share amounts)
Notes 20162017
Operating revenue 25 ₩ 17,341,316 ₩ 17,028,868 Operating expenses 26 16,389,155 15,969,277 Operating profit 952,161 1,059,591 Other income 27 390,253 513,927 Other expenses 27 505,973 325,448 Finance income 28 351,624 257,016 Finance costs 28 575,673 470,490 Profit before income tax 612,392 1,034,596 Income tax expense 29 149,124 225,266 Profit for the year ₩ 463,268 ₩ 809,330
Earnings per share Basic earnings per share 30 ₩ 1,891 ₩ 3,305 Diluted earnings per share 30 1,890 3,304
The above separate statements of profit or loss should be read in conjunction with the accompanying notes. 5 KT Corporation Separate Statements of Comprehensive Income Years Ended December 31, 2017 and 2016
(in millions of Korean won)
Notes 20162017
Profit for the year ₩ 463,268 ₩ 809,330 Other comprehensive income Items that will not be reclassified to profit or loss: Remeasurements of the net 17 (76,677) 22,399 defined benefit liability Items that may be subsequently reclassified to profit or loss: Changes in value of available-for-sale 4,7 (5) (164) financial assets Other comprehensive income from available-for sale financial 4 - (2,941) assets reclassified to loss
Net gain(loss) on cash flow hedges 4,7 (111,335) 64,155
Other comprehensive income from cash flow hedges 4 141,929 (75,871) reclassified to gain(loss) Total other comprehensive income(loss) ₩ (46,088) ₩ 7,578 Total comprehensive income for the year ₩ 417,180 ₩ 816,908
The above separate statements of comprehensive income should be read in conjunction with the accompanying notes.
6 KT Corporation Separate Statements of Changes in Equity Years Ended December 31, 2017 and 2016
(in millions of Korean won)
Accumulated Other Share Retained other Notes Share capital components of Total premium earnings comprehensive equity income
Balance as of January 1, 2016 ₩ 1,564,499 ₩ 1,440,258 ₩ 8,446,950 ₩ (17,270) ₩ (1,050,481) ₩ 10,383,956 Comprehensive income Profit for the year - - 809,330 - - 809,330 Changes in value of available-for-sale financial assets 4 - - - (3,105) - (3,105) Remeasurement of the net defined benefit liability 17 - - 22,399 - - 22,399 Valuation loss on cash flow hedge 4 - - - (11,716) - (11,716) Total Comprehensive income for the year - - 831,729 (14,821) - 816,908 Transactions with equity holders
Dividends - - (122,425) - - (122,425)
Appropriation of loss on disposal of - - (50) - 50 - treasury stock Others - - - - 6,080 6,080 Balance as of December 31, 2016 ₩ 1,564,499 ₩ 1,440,258 ₩ 9,156,204 ₩ (32,091) ₩ (1,044,351) ₩ 11,084,519
Balance as of January 1, 2017 ₩ 1,564,499 ₩ 1,440,258 ₩ 9,156,204 ₩ (32,091) ₩ (1,044,351) ₩ 11,084,519 Comprehensive income Profit for the year - - 463,268 - - 463,268 Changes in value of available-for-sale financial assets 4 - - - (5) - (5) Remeasurement of the net defined benefit liability 17 - - (76,677) - - (76,677) Valuation gain on cash flow hedge 4 - - - 30,594 - 30,594 Total Comprehensive income for the year - - 386,591 30,589 - 417,180 Transactions with equity holders
Dividends 31 - - (195,977) - - (195,977)
Appropriation of loss on disposal of 22 - - (2,312) - 2,312 - treasury stock Others - - - - 5,356 5,356 Balance as of December 31, 2017 ₩ 1,564,499 ₩ 1,440,258 ₩ 9,344,506 ₩ (1,502) ₩ (1,036,683) ₩ 11,311,078
The above separate statements of changes in equity should be read in conjunction with the accompanying notes.
7 KT Corporation Separate Statements of Cash Flows Years Ended December 31, 2017 and 2016
(in millions of Korean won)
Notes 2017 2016
Cash flows from operating activities Cashgeneratedfromoperations 32 ₩ 3,700,944 ₩ 4,577,190 Interestpaid (242,098) (362,636) Interestreceived 63,147 77,306 Dividendsreceived 139,448 172,962 Incometaxpaid (182,800) (46,174) Net cash inflow from operating activities 3,478,641 4,418,648
Cash flows from investing activities Collectionofloans 52,317 43,131 Disposaloffinancialinstruments 160,001 1,050 Disposalofavailable-for-salefinancialassets 9,411 28,127 DisposalofInvestmentsinsubsidiaries,associatesandjointventures 60,168 9,538 Disposalofpropertyandequipment 23,574 44,074 Disposalofintangibleassets 17,626 10,381 Loansgranted (51,468) (55,284) Acquisitionofcurrentfinancialinstruments (50,000) (160,000) Acquisitionofavailable-for-salefinancialassets (3,776) (41,757) AcquisitionofInvestmentsinsubsidiaries,associatesandjointventures (80,145) (147,540) Acquisitionofpropertyandequipment (2,211,867) (2,392,924) Acquisitionofintangibleassets (537,340) (383,076) Net cash outflow from in investing activities (2,611,499) (3,044,280)
Cash flows from financing activities 33 Proceedsfromborrowingsandbonds 444,348 846,730 Settlementofderivativesassetsandliabilities,net 71,370 (33,193) Repaymentsofborrowingsanddeventures (1,551,268) (1,512,700) Dividendpaid (195,977) (122,425) Decreaseinfinanceleasesliabilities (71,575) (75,439) Net cash outflow from financing activities (1,303,102) (897,027)
Effect of exchange rate chage on cash and cash equivalents (35) (1,935) Net increase (decrease) in cash and cash equivalents (435,995) 475,406 Cash and cash equivalents Beginningoftheyear 5 1,602,397 1,126,991 Endoftheyear 5 ₩ 1,166,402 ₩ 1,602,397
The above separate financial statements of cash flow should be read in conjunction with the accompanying notes.
8 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
1. General information
KT Corporation (the “Company”) commenced operations on January 1, 1982, when it spun off from the Korea Communications Commission (formerly the Korean Ministry of Information and Communications) to provide telephone services and to engage in the development of advanced communications services under the Act of Telecommunications of Korea. The address of the Company’s registered office is 90, Buljeong-ro, Bundang-gu, Seongnam City, Gyeonggi Province, Korea.
On October 1, 1997, upon the announcement of the Act on the Management of Government-Invested Institutions and the Privatization Law, the Company became a government-funded institution under the Commercial Code of Korea.
On December 23, 1998, the Company’s shares were listed on the Korea Exchange.
On May 29, 1999, the Company issued 24,282,195 additional shares and issued American Depository Shares (ADS), representing new shares and 20,813,311 government-owned shares, at the New York Stock Exchange. On July 2, 2001, the additional ADS representing 55,502,161 government-shares were issued at the New York Stock Exchange.
In 2002, the Company acquired the entire government-owned shares in accordance with the Korean government’s privatization plan. At the end of reporting period, the Korean government does not own any share in the Company.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Company in the preparation of its financial statements. These policies have been consistently applied to all the years presented, unless otherwise stated.
2.1 Basis of Preparation
The Company maintains its accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in accordance with International Financial Reporting Standards as adopted by the Republic of Korea (Korean IFRS). The accompanying separate financial statements have been condensed, restructured and translated into English from the Korean language financial statements.
Certain information attached to the Korean language financial statements, but not required for a fair presentation of the Company's financial position, financial performance or cash flows, is not presented in the accompanying separate financial statements.
9 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
The separate financial statements of the Company have been prepared in accordance with Korean IFRS. These are the standards and related interpretations issued by the International Accounting Standards Board (IASB) that have been adopted by the Republic of Korea.
The preparation of the separate financial statements requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the separate financial statements are disclosed in Note 3.
2.2 Changes in Accounting Policy and Disclosures
(1) New standards and amendments adopted by the Company
The Company has applied the following standards and amendments for the first time for their annual reporting period commencing January 1, 2017. The adoption of these amendments did not have any material impact on the separate financial statements.
- Amendments to Korean IFRS 1007 Statement of Cash Flows Amendments to Korean IFRS 1007 Statement of Cash flows require to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash flows (Note 33).
- Amendments to Korean IFRS 1012 Income Tax Amendments to Korean IFRS 1012 clarify how to account for deferred tax assets related to debt instruments measured at fair value. Korean IFRS 1012 provides requirements on the recognition and measurement of current or deferred tax liabilities or assets. The amendments issued clarify the requirements on recognition of deferred tax assets for unrealized losses, to address diversity in practice.
- Amendments to Korean IFRS 1112 Disclosures of Interests in Other Entities Amendments to Korean IFRS 1112 clarify when an entity’s interest in a subsidiary, a joint venture or an associate is classified as held for sales in accordance with Korean IFRS 1105, the entity is required to disclose other information except for summarized financial information in accordance with Korean IFRS 1112.
10 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
(2) New standards, amendments and interpretations not yet adopted Certain new accounting standards and interpretations that have been published that are not mandatory for annual reporting period commencing January 1, 2017 and have not been early adopted by the Company are set out below.
- Amendment to Korean IFRS 1040 Transfers of Investment Property Paragraph 57 of Korean IFRS 1040 clarifies that a transfer to, or from, investment property, including property under construction, can only be made if there has been a change in use that is supported by evidence, and provides a list of circumstances as examples. The amendment will be effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The Company does not expect the amendment to have a significant impact on the financial statements.
- Amendments to Korean IFRS 1102 Share-based Payment Amendments to Korean IFRS 1102 clarify accounting for a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity- settled. Amendments also clarify that the measurement approach should treat the terms and conditions of a cash-settled award in the same way as for an equity-settled award. The amendments will be effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The Company does not expect the amendments to have a significant impact on the financial statements
- Enactments to Interpretation 2122 Foreign Currency Transaction and Advance Consideration According to these enactments, the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. If there are multiple payments or receipts in advance, the entity shall determine a date of the transaction for each payment or receipt of advance consideration. These enactments will be effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The Company does not expect the enactments to have a significant impact on the financial statements.
11 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
- Enactment of Korean IFRS 1116 Leases Korean IFRS 1116 Leases issued on May 22, 2017 is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted. This standard will replace Korean IFRS 1017 Leases, Interpretation 2104 Determining whether an Arrangement contains a Lease, Interpretation 2015 Operating Leases-Incentives, and Interpretation 2027 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.
At inception of a contract, the entity shall assess whether the contract is, or contains, a lease. Also, at the date of initial application, the entity shall assess whether the contract is, or contains, a lease in accordance with the standard. However, the entity will not need to reassess all contracts with applying the practical expedient because the entity elected to apply the practical expedient only to contracts entered before the date of initial application.
For a contract that is, or contains, a lease, the entity shall account for each lease component within the contract as a lease separately from non-lease components of the contract. A lessee is required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. The lessee may elect not to apply the requirements to short-term lease (a lease term of 12 months or less at the commencement date) and low value assets (e.g. underlying assets below $ 5,000). In addition, as a practical expedient, the lessee may elect, by class of underlying asset, not to separate non-lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component.
(a) Lessee accounting A lessee shall apply this standard to its leases either: - retrospectively to each prior reporting period presented applying Korean IFRS 1008 Accounting Policies, Changes in Accounting Estimates and Errors (Full retrospective application); or - retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company has not yet elected the application method.
The Company performed an impact assessment to identify potential financial effects of applying Korean IFRS 1116. The assessment was performed based on available information as at December 31, 2017 to identify effects on 2017 financial statements. The Company is analyzing the effects on the financial statements; however, it is difficult to provide reasonable estimates of financial effects until the analyses is complete.
12 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
(b) Lessor accounting The Company expects the effect on the financial statements applying the new standard will not be significant as accounting for the Company, as a lessor, will not significantly change.
- Korean IFRS 1109 Financial Instruments The new standard for financial instruments issued on September 25, 2015 are effective for annual periods beginning on or after January 1, 2018 with early application permitted. This standard will replace Korean IFRS 1039 Financial Instruments: Recognition and Measurement. The Company will apply the standards for annual periods beginning on or after January 1, 2018.
The standard requires retrospective application with some exceptions. For example, an entity is not required to restate prior period in relation to classification and measurement (including impairment) of financial instruments. The standard requires prospective application of its hedge accounting requirements for all hedging relationships except the accounting for time value of options and other exceptions.
Korean IFRS 1109 Financial Instruments requires all financial assets to be classified and measured on the basis of the entity’s business model for managing financial assets and the contractual cash flow characteristics of the financial assets. A new impairment model, an expected credit loss model, is introduced and any subsequent changes in expected credit losses will be recognized in profit or loss. Also, hedge accounting rules amended to extend the hedging relationship, which consists only of eligible hedging instruments and hedged items, qualifies for hedge accounting.
An effective implementation of Korean IFRS 1109 requires preparation processes including financial impact assessment, accounting policy establishment, accounting system development and the system stabilization. The impact on the Company’s financial statements due to the application of the standard is dependent on judgements made in applying the standard, financial instruments held by the Company and macroeconomic variables. The following areas are likely to be affected in general with the implementation of Korean IFRS 1109. The Company is in preparation for analyzing the effects to the separate financial statement.
13 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
(a) Classification and Measurement of Financial Assets When implementing Korean IFRS 1109, the classification of financial assets will be driven by the Company’s business model for managing the financial assets and contractual terms of cash flow. The following table shows the classification of financial assets measured subsequently at amortized cost, at fair value through other comprehensive income and at fair value through profit or loss. For hybrid (combined) instruments, if the Company is unable to measure an embedded derivative separately from its host contract, financial assets with embedded derivatives are classified in their entirety.
Business model for the contractual cash flows Solely represent payments of characteristics principal and interest All other
Hold the financial asset for the collection of the contractual cash Measured at amortized cost1 flows Recognized at fair value through Hold the financial asset for the profit or loss2 Recognized at fair value through collection of the contractual cash other comprehensive income 1 flows and sale Recognized at fair value through Hold for sale profit or loss 1 A designation at fair value through profit or loss is allowed only if such designation mitigates an accounting mismatch (irrevocable). 2 Equity investments not held for trading can be recorded in other comprehensive income (irrevocable).
With the implementation of Korean IFRS 1109, the criteria to classify the financial assets at amortized cost or at fair value through other comprehensive income are more strictly applied than the criteria applied with Korean IFRS 1039. Accordingly, the financial assets at fair value through profit or loss may increase by implementing Korean IFRS 1109 and may result an extended fluctuation in profit or loss.
As of December 31, 2017, the Company owns loan and trade receivables of \ 4,700,752 million, financial assets available-for-sales of \ 64,916 million.
According to Korean IFRS 1109, equity instruments that are not held for trading, the Company can make an irrevocable election at initial recognition to classify the instruments as assets measured at fair value through other comprehensive income, which all subsequent changes in fair value being recognized in other comprehensive income and not recycled to profit or loss. As at December 31, 2017, the Company holds equity instruments of \ 60,016 million classified as financial assets available-for-sale.
14 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
According to Korean IFRS 1109, debt instruments those contractual cash flows do not represent solely payments of principal and interest and held for trading, and equity instruments that are not designated as instruments measured at fair value through other comprehensive income are measured at fair value through profit or loss.
(b) Impairment: Financial Assets and Contract Assets Korean IFRS 1109 sets out a new forward looking ‘expected loss’ impairment model which replaces the incurred loss model under Korean IFRS 1039 and applies to: Financial assets measured at amortized cost Debt investments measured at fair value through other comprehensive income, and Certain loan commitments and financial guaranteed contracts. And the Company could recognize credit losses early in accordance with Korean IFRS 1039. The Company holds debt instrument of \ 4,700,752 million (Loan and trade receivables of \ 4,700,752 million). For this assets, the Company provides loss allowance of \ 449,920 million.
(c) Hedge Accounting Hedge accounting mechanics (fair value hedges, cash flow hedges and hedge of net investments in a foreign operations) required by Korean IFRS 1039 remains unchanged in Korean IFRS 1109, however, the new hedge accounting rules will align the accounting for hedging instruments more closely with the Company’s risk management practices. As a general rule, more hedge relationships might be eligible for hedge accounting, as the standard introduces a more principles-based approach. Korean IFRS 1109 allows more hedging instruments and hedged items to qualify for hedge accounting, and relaxes the hedge accounting requirement by removing two hedge effectiveness tests that are a prospective test to ensure that the hedging relationship is expected to be highly effective and a quantitative retrospective test (within range of 80-125 %) to ensure that the hedging relationship has been highly effective throughout the reporting period. As of December 31, 2017, the Company applies the hedge accounting to its assets, liabilities that amount to \ 7,389 million, \ 81,200 million respectively.
15 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
- Korean IFRS 1115 Revenue from Contracts with Customers The Company will apply Korean IFRS 1115 Revenue from Contracts with Customers issued on November 6, 2015 for annual reporting periods beginning on or after January 1, 2018, and earlier application is permitted. This standard replaces Korean IFRS 1018 Revenue, Korean IFRS 1011 Construction Contracts, Interpretation 2031 Revenue-Barter Transactions Involving Advertising Services, Interpretation 2113 Customer Loyalty Programs, Interpretation 2115 Agreements for the Construction of Real Estate and Interpretation 2118 Transfers of assets from customers. The Company must apply Korean IFRS 1115 Revenue from Contracts with Customers within annual reporting periods beginning on or after January 1, 2018, and will elect the modified retrospective approach which will recognize the cumulative impact of initially applying the revenue standard as an adjustment to retained earnings as at January 1 2018, the period of initial application.
The new standard is based on the principle that revenue is recognized when control of a good or service transfers to a customer so the notion of control replaces the existing notion of risks and rewards. A new five-step process must be applied before revenue from contract with customer can be recognized: Identify contracts with customers Identify the separate performance obligation Determine the transaction price of the contract Allocate the transaction price to each of the separate performance obligations, and Recognize the revenue as each performance obligation is satisfied.
The Company formed a task force team since fourth quarter of 2014 for preparation of implementing Korean IFRS 1115 Revenue from Contracts with Customers. Also the Company develops the internal control system and implements accounting process system by analyzing the Company’s revenue structure with accounting experts and IT specialists. Korean IFRS 1115 will affect not only accounting treatments but also the general business practice including sales strategy and operational structures. Therefore, the Company accomplished an orientation program for both Company’s directors and employees, and periodically reported to the managements about implementation plan and progress.
As at the December 31, 2017, the Company is analyzing the effects on the financial statement with the implementation of Korean IFRS 1115. The Company plans to perform detailed analysis on financial effects of applying the standard until March 31, 2018 and will disclose the result of the analysis in the notes on the consolidated financial statement as of March 31, 2018. The Company identified the following areas are likely to be affected in general.
16 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
(a) Identifying performance obligations The Company provides telecommunication services and sells handsets as their main business. With the implementation of Korean IFRS 1115, the Company identifies performance obligations with a customer such as providing telecommunication services, selling handsets and other. The timing of revenue recognition depends on a performance obligation is satisfied at a point in time or over time. Where a performance obligation is satisfied over time, the related revenue is also recognized over time
(b) Allocation the transaction price and Revenue recognition With the implementation of Korean IFRS 1115, the Company allocates the transaction price to each performance obligation identified in the contract based on a relative stand-alone selling prices of the goods or services being provided to the customer. To allocate the transaction price to each performance obligation on a relative stand-alone price basis, the Company determines the stand- alone selling price at contract inception of the distinct good or service underlying each performance obligation in the contract and allocate the transaction price in proportion to those stand-alone selling price. The stand-alone selling price is the price at which the Company would sell a promised good or service separately to the customer. The best evidence of a stand-alone selling price is the observable price of a good or service when the Company sells that good or service separately in similar circumstances and to similar customers. The Company recognizes the allocated amount as contract assets or contract liabilities, and amortizes it through the remaining period which is adjusted in operating income.
(c) Incremental contract acquisition costs The Company pays the commission fees when new customer subscribe for telecommunication services. The incremental contract acquisition costs are those commission fess that the Company incurs to acquire a contract with a customer that it would not have incurred if the contract had not been acquired.
According to Korean IFRS 1115, the Company recognizes as an asset the incremental contract acquisition costs and amortize it over the expected period of benefit. However, as a practical expedient, the Company may recognize the incremental contract acquisition costs as an expense when incurred if the amortization period of the asset is one year or less.
With implementation of Korean IFRS 1115, the Company’s operating income and expenses are expected to be decreased.
17 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
2.3 Subsidiaries, Associates and Joint ventures
The financial statements of the Company are the separate financial statements based on Korean IFRS 1027 Separate Financial Statements. Investments in subsidiaries, joint ventures, and associates are recognized at cost under the direct equity method. Management applied the carrying amounts under the previous K-GAAP at the time of first adoption of the Korean IFRS as deemed cost of investments. The Company recognizes dividend income from subsidiaries, jointly controlled entities or associates in profit or loss when its right to receive dividend is established.
2.4 Foreign Currency Translation
(1) Functional and presentation currency Items included in the financial statements of the Company are measured using the currency of the primary economic environment in which the Company operates (the ‘functional currency’). The separate financial statements are presented in Korean won, which is the Company’s functional and presentation currency.
(2) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates are generally recognized in profit or loss.
Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non-monetary assets and liabilities such as equities held at fair value through profit or loss are recognized in profit or loss as part of the fair value gain or loss and translation differences on non-monetary assets such as equities classified as available-for-sale financial assets are recognized in other comprehensive income.
2.5 Cash and Cash Equivalents
Cash and cash equivalents include cash in hand, deposits held at call with banks, and other short- term highly liquid investments with original maturities of less than three months.
18 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
2.6 Financial Assets
(1) Classification and measurement The Company classifies its financial assets in the following categories: financial assets at fair value through profit or loss, available-for-sale financial assets, loans and receivables, and held-to-maturity financial assets. Regular way purchases and sales of financial assets are recognized on trade-date, the date on which the Company commits to purchase or sell the asset.
The Company may designate the entire hybrid (combined) contract as a financial asset at fair value through profit or loss for a contract that contains one or more embedded derivatives.
At initial recognition, the Company measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. And, loans and receivables and held-to-maturity investments are subsequently carried at amortized cost using the effective interest method.
Gains or losses arising from changes in the fair value of financial assets at fair value through profit or loss are recognized in profit or loss within other income or other expenses. Gains or losses arising from changes in the available-for-sale financial assets are recognized in other comprehensive income, and amounts are reclassified to profit or loss when the associated assets are sold or impaired.
(2) Impairment The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or a Company of financial assets is impaired. A financial asset or a Company of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or a Company of financial assets that can be reliably estimated.
Impairment of loans and receivables is presented as a deduction in an allowance account. Impairment of other financial assets is directly deducted from their carrying amount. The Company writes off financial assets when the assets are determined to be no longer recoverable.
19 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
The criteria that the Company uses to determine that there is objective evidence of an impairment loss include: Significant financial difficulty of the issuer or obligor; A breach of contract, such as a default or delinquency in interest or principal payments; For economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider; It becomes probable that the borrower will enter bankruptcy or other financial reorganization; The disappearance of an active market for that financial asset because of financial difficulties; or Observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio.
(3) Derecognition If the Company transfers a financial asset and the transfer does not result in derecognition because the Company has retained substantially of all risks and rewards of ownership of the transferred asset due to a recourse in the event the debtor defaults, the Company continues to recognize the transferred asset in its entirety and recognizes a financial liability for the consideration received. The related financial liability is classified as ‘borrowings’ in the statement of financial position.
(4) Offsetting of financial instruments Financial assets and liabilities are offset and the net amount reported in the statements of financial position where there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the assets and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Company or the counterparty.
2.7 Derivative Instruments
Derivatives are initially recognized at fair value on the date when a derivative contract is entered into and are subsequently remeasured at their fair value. Changes in the fair value of the derivatives that are not qualified for hedge accounting are recognized in the statement of profit or loss within ‘other income (expenses)’ and 'finance income (expenses)' according to the nature of transactions.
20 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
If the Company uses a valuation technique that incorporates data not obtained from observable markets for the fair value at initial recognition of the financial instrument, there may be a difference between the transaction price and the amount determined using that valuation technique (Day 1 profit and loss). In these circumstances, the fair value of the financial instrument is recognized as the transaction price and the difference is amortized by using the straight-line method over the life of the financial instrument. If the fair value of the financial instrument is subsequently determined using observable market inputs, the remaining deferred amount is recognized in profit or loss in the statement of profit or loss.
The Company applies cash flow hedge accounting to hedge the risks of foreign exchange and interest rates of the variable rate foreign currency bonds. The effective portion of changes in the fair value of derivatives that are designated and qualified as cash flow hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately as finance income (expenses) in the statement of profit or loss. Amounts of changes in fair value of effective hedging instruments accumulated in other comprehensive income are recognized as ‘finance income (expenses)’ for the periods when the corresponding transactions affect profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that is reported in other comprehensive income is recognized as ‘finance income (expenses)’.
2.8 Inventories
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the moving average method, except for inventories in-transit which is determined using the specific identification method.
2.9 Non-current Assets (or Disposal Group) Held-for-sale
Non-current assets (or disposal group) are classified as assets held-for-sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. The assets are measured at the lower amount between their carrying amount and the fair value less costs to sell.
21 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
2.10 Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Historical cost includes expenditures that is directly attributable to the acquisition of the items.
Depreciation of all property, plant and equipment, except for land, is calculated using the straight-line method to allocate their cost, net of their residual values, over their estimated useful lives, as follows:
Estimated Useful Life Buildings 10 – 40 years Structures 10 – 40 years Telecommunicationsequipment 2–40years Vehicles 4 years Others Tools 4 years Officeequipment 2–4years
The depreciation method, residual values and useful lives of property and equipment are reviewed at the end of each reporting period and, if appropriate, accounted for as changes in accounting estimates.
2.11 Investment Property
Investment property is a property held to earn rentals or for capital appreciation or both. An investment property is measured initially at its cost. After recognition as an asset, investment property is carried at cost less accumulated depreciation and impairment losses. Investment property, except for land, is depreciated using the straight-line method over their useful lives from 10 to 40 years.
2.12 Intangible Assets
(1) Goodwill Goodwill represents the excess of the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of the Company’s previously held equity interest in the acquiree over the net acquired identifiable assets at the date of acquisition. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses.
22 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the CGUs, or group of CGUs, that is expected to benefit from the synergies of the combination. Goodwill is monitored at the operating segment level.
Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying amount of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment is recognized immediately as an expense and is not subsequently reversed.
(2) Intangible assets, except for goodwill Intangible assets, except for goodwill, are initially recognized at its historical cost, and carried at cost less accumulated amortization and accumulated impairment losses. Membership rights (condominium membership and golf membership) and broadcast rights that have an indefinite useful life are not subject to amortization because there is no foreseeable limit to the period over which the assets are expected to be utilized. The Company amortizes intangible assets with a limited useful life using the straight-line method over the following periods:
Estimated Useful Life Developmentcosts 6years Goodwill indefiniteusefullife Software 6 years Industrial property rights 5 – 50 years Frequency usage rights 5 – 10 years Others 1 2 – 50 years 1 Membership rights (condominium membership and golf membership) included in others are classified as intangible assets with indefinite useful life.
2.13 Borrowing Costs
General and specific borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized during the period of time that is required to complete and prepare the asset for its intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. Other borrowing costs are expensed in the period in which they are incurred.
23 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
2.14 Government Grants
Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Company will comply with all attached conditions. Government grants related to assets are presented in the statement of financial position by setting up the grant as deferred income that is recognized in profit or loss on a systematic basis over the useful life of the asset. Grants related to income are presented as a credit in the statement of profit or loss within ‘other income’.
2.15 Impairment of Non-financial Assets
Goodwill and intangible assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. Non- financial assets, other than goodwill, that suffered impairment are reviewed for possible reversal of the impairment at the end of reporting period.
2.16 Financial Liabilities
(1) Classification and measurement Financial liabilities at fair value through profit or loss are financial instruments held for trading. Financial liabilities are classified in this category if incurred principally for the purpose of repurchasing them in the near term. Derivatives that are not designated as hedges or bifurcated from financial instruments containing embedded derivatives are also categorized as held-for-trading.
The Company classifies non-derivative financial liabilities, except for financial liabilities at fair value through profit or loss, financial guarantee contracts and financial liabilities that arise when a transfer of financial assets does not qualify for derecognition, as financial liabilities carried at amortized cost and presented as ‘trade and other payables’, ‘borrowings’, and ‘other financial liabilities’ in the statement of financial position.
24 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
(2) Derecognition Financial liabilities are removed from the statement of financial position when it is extinguished, for example, when the obligation specified in the contract is discharged or cancelled or expired or when the terms of an existing financial liability are substantially modified.
2.17 Employee Benefits
(1) Post-employment benefits The Company operates both defined benefit and defined contribution plans.
A defined contribution plan is a pension plan under which the Company pays fixed contributions into a separate entity. The contributions are recognized as employee benefit expenses when an employee has rendered service.
A defined benefit plan is a pension plan that is not a defined contribution plan. Generally, post- employment benefits are payable after the completion of employment, and the benefit amount depended on the employee’s age, periods of service or salary levels. The liability recognized in the statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms approximating to the terms of the related obligation. Remeasurement gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in the period in which they occur, directly in other comprehensive income.
Changes in the present value of the defined benefit obligation resulting from plan amendments or curtailments are recognized immediately in profit or loss as past service costs.
25 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
(2) Termination benefits Termination benefits are payable when employment is terminated by the Company before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Company recognizes termination benefits at the earlier of the following dates: when the entity can no longer withdraw the offer of those benefits or when the entity recognizes costs for a restructuring.
2.18 Share-based Payments
Equity-settled share-based payment is recognized at fair value of equity instruments on grant date, and employee benefit expense is recognized over the vesting period. At the end of each period, the Company revises its estimates of the number of options that are expected to vest based on the non- market vesting and service conditions. It recognizes the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity.
2.19 Provisions
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation, and the increase in the provision due to passage of time is recognized as interest expense.
2.20 Leases
A lease is an agreement, whereby the lessor conveys to the lessee, in return for a payment or series of payments, the right to use an asset for an agreed period of time. Leases where all the risks and rewards of ownership are not transferred to the Company are classified as operating leases. Lease payments under operating leases are recognized as expenses on a straight-line basis over the lease term.
Leases where the Company has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized as lease assets and liabilities at the lease’s inception at the fair value of the leased property or, if lower, the present value of the minimum lease payments.
26 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
2.21 Share Capital
The Company classifies ordinary shares as equity.
Where the Company purchases its own shares, the consideration paid including any directly attributable incremental costs is deducted from equity attributable to the equity holders of the Company until the share are cancelled or reissued. When these treasury shares are reissued, any consideration received is including in equity attributable to the equity holders of the Company.
2.22 Revenue Recognition
Revenue is measured at the fair value of the consideration received or receivable for the sale of goods or rendering of services arising from the normal activities of the Company. Amounts disclosed as revenue are net of value added taxes, returns, rebates and discounts and after elimination of intra- company transactions.
The Company recognizes revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the Company; and when specific criteria have been met for each of the Company’s activities, as described below. The Company bases its estimate on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.
(1) Rendering services When providing interconnection or telecommunications service to a customer based on service plans, the related revenue is recognized at the time service is provided. If the customer uses the telecommunications equipment according to the service plans, the related revenue is recognized on straight-line basis over the contract period. Revenue related to the other telecommunications services is recognized when the service is provided to the customer.
For other services, when the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with such a transaction is recognized by reference to the stage of performance of the services. When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue is recognized only to the extent of the expenses recognized that are recoverable.
27 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Total consideration for combined services is allocated to each service in proportion to its fair value and the allocated amount is recognized as revenue according to revenue recognition policy for the service.
(2) Sales of goods The Company sells a range of handsets. Revenue from the sale of goods is recognized when products are delivered to the purchaser.
(3) Interest income Interest income is recognized using the effective interest method according to the time passed. When a loan and receivable is impaired, the Company reduces the carrying amount to its recoverable amount and continues unwinding the discount as interest income. Interest income on impaired loans and receivables is recognized using the original effective interest rate.
(4) Royalty income Royalty income is recognized on an accrual basis in accordance with the substance of the relevant agreements.
(5) Dividend income Dividend income is recognized when the right to receive payment is established.
(6) Customer loyalty program The Company operates a customer loyalty program where customers accumulate points for purchases made which entitle them to discounts on future purchases. The reward points are recognized as a separately identifiable component of the initial sale transaction. The fair value of the consideration received or receivable in respect of the initial sale is allocated between the reward points and the other components of the sale. The fair value of the reward points is measured by taking into account the proportion of the reward points that are not expected to be redeemed by customers. Revenue from the reward points is recognized when the points are redeemed.
28 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
2.23 Current and Deferred Income Tax
The tax expense for the period consists of current and deferred tax. Tax is recognized on the profit for the period in the statement of profit or loss, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. The tax expense is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period.
Management periodically evaluates tax policies that are applied in tax returns in which applicable tax regulation is subject to interpretation. The Company recognizes current income tax on the basis of the amount expected to be paid to the tax authorities.
Deferred tax is recognized for temporary differences arising between the tax bases of assets and liabilities and their carrying amounts as expected tax consequences at the recovery or settlement of the carrying amounts of the assets and liabilities. However, deferred tax assets and liabilities are not recognized if they arise from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.
Deferred tax assets are recognized only if it is probable that future taxable amount will be available to utilize those temporary differences and losses.
Deferred tax liability is recognized for taxable temporary differences associated with investments in subsidiaries, associates, and interests in joint ventures, except to the extent that the Company is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. In addition, deferred tax asset is recognized for deductible temporary differences arising from such investments to the extent that it is probable the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
29 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
The Company adopts the consolidated corporate tax return and calculates income tax expenses and income tax liabilities of the Company and its subsidiaries based on systematic and reasonable methods.
2.24 Dividend
Dividend distribution to the Company’s shareholders is recognized as a liability in the financial statements in the period in which the dividends are approved by the Company’s shareholders.
2.25 Approval of Issuance of the Financial Statements
The issuance of the December 31, 2017 separate financial statements of the Company was approved by the Board of Directors on February 6, 2018, which is subject to change with approval at the annual shareholders’ meeting.
3. Critical Accounting Estimates and Assumptions
The Company makes estimates and assumptions concerning the future. The estimates and assumptions are continuously evaluated with consideration to factors such as events reasonably predictable in the foreseeable future within the present circumstance according to historical experience. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.
3.1 Impairment of Goodwill
The Company tests whether goodwill has suffered any impairment on an annual basis. The recoverable amounts of cash-generating units (CGUs) is determined based on value-in-use calculations (Note 12).
30 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
3.2 Income Taxes
The Company is operating in numerous countries and the income generated from these operations is subject to income taxes based on tax laws and interpretations of tax authorities in numerous jurisdictions. There are many transactions and calculations for which the ultimate tax determination is uncertain.
If certain portion of the taxable income is not used for investments or increase in wages or dividends in accordance with the Tax System For Recirculation of Corporate Income, the Company is liable to pay additional income tax calculated based on the tax laws. The new tax system is effective for three years from 2015. Accordingly, the measurement of current and deferred income tax is affected by the tax effects from the new system. As the Company’s income tax is dependent on the investments, increase in wages and dividends, there is an uncertainty in measuring the final tax effects.
3.3 Fair Value of Derivatives and Other Financial Instruments
The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Company uses its judgment to select a variety of methods and makes assumptions that are mainly based on market conditions existing at the end of each reporting period (Note 36).
3.4 Provision for Impairment
The Company recognizes provisions for accounting of estimated loss in customers' insolvency. When the provision for impairment is estimated, it is based on the aging analysis of trade receivables balances, incurred loss experience, customers' credit rates and changes of payment terms. If the customer's financial position becomes worse, the actual loss amount will be increased more than the estimated.
3.5 Net defined benefit liability
The present value of net defined benefit liability depends on a number of factors that are determined on an actuarial basis using a number of assumptions including the discount rate (Note 17).
31 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
3.6 Deferred Revenue
Service installation fees and initial subscription fees related to activation of service are deferred and recognized as revenue over the expected periods of customer relationships. The estimate of the expected terms of customer relationship is based on the historical data. If management’s estimate changes, it may cause significant differences in the timing of revenue recognition and amounts recognized.
3.7 Provisions
As described in Note 16, the Company records provisions for litigation and assets retirement obligations at the end of the reporting period. The provisions are estimated based on the factors such as the historical experiences.
3.8 Useful Lives of Property and Equipment and Investment Property
The property and equipment, intangible assets, and investment properties, excluding land, goodwill, condominium memberships and golf club memberships, are depreciated using the straight-line method over their useful lives. The estimated useful lives are determined based on expected usage of the assets and the estimates can be materially affected by technical changes and other factors. The Company will increase depreciation expenses if the useful lives are considered shorter than the previously estimated useful lives.
32 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
4. Financial Instruments by Category
Financial instruments by category as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December 31, 2017 Loans and Derivatives used for Available -for-sale Total Financial assets receivables hedge
Cash and cash equivalents \ 1,166,402 \ - \ - \ 1,166,402 Trade and other receivables 3,475,985 - - 3,475,985 Other financial assets 58,365 7,389 64,916 130,670
(in millions of Korean won) December 31, 2017 Liabilities at fair value Derivatives used for Financial liabilities Financial liabilities through profit and loss hedge at amortized cost Total
\ - \ 5,067,713 \ 5,067,713 Trade and other payables \ - - 6,212,934 6,212,934 Borrowings - 81,200 - 86,251 Other financial liabilities 5,051
(in millions of Korean won) December 31, 2016 Loans and Derivatives used for Financial assets receivables hedge Available -for-sale Total
Cash and cash equivalents \ 1,602,397 \ - \ - \ 1,602,397 Trade and other receivables 3,212,206 - - 3,212,206 Other financial assets 168,366 214,648 105,376 488,390
(in millions of Korean won) December 31, 2016 Liabilities at fair value Derivatives used for Financial liabilities Financial liabilities through profit and loss hedge at amortized cost Total
Trade and other payables \ - \ - \ 5,316,830 \ 5,316,830 Borrowings - - 7,569,047 7,569,047 Other financial liabilities 1,973 11,413 - 13,386
Gains and losses arising from financial instruments by category for the years ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 2016 Loans and receivables Interest income \ 72,384 \ 98,170 Loss on valuation (32,728) (81,059) Gain on foreign currency transactions (1,424) 4,532 Gain on foreign currency translation (11,751) 9,271 Loss on disposal (19,389) (15,838) Derivative used for hedge Loss on transactions (58,569) - Gain on valuation (63,640) 92,752
33 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Other comprehensive income for the year1 (44,429) 60,391 Reclassified to profit of loss from other comprehensive 50,231 (71,915) income for the year 1,2 Available -for-sale Interest income 272 90 Dividend income 2 198 Gain on disposal 4,690 22,326 Impairment loss (9) - Other comprehensive income for the year 1 (5) (164) Reclassified to profit or loss from other comprehensive - (2,941) income for the year 1 Financial liability at fair value through profit or loss Gain (loss) on valuation (3,078) 33 Derivatives used for hedging Gain (loss) on transactions - 8,329 Gain on valuation (123,828) 4,406 Other comprehensive income for the year 1 (66,906) 3,764 Reclassified to profit or loss from other comprehensive 91,698 (3,956) income for the year 1, 2 Financial liabilities at amortized cost Interest expense 3 (282,243) (318,926) Loss on foreign currency transactions 58,713 (6,302) Loss on foreign currency translation 200,833 (112,076) Total \ (229,176) \ (308,915)
1 The amounts directly reflected in equity after adjustments of deferred income tax. 2 During the current and previous year, certain derivatives of the Company were settled and the related gain or loss on valuation of cash flow hedge in other comprehensive income was reclassified to profit or loss for the year. 3 The amounts reflected as interest expense arising from derivatives.
5. Cash and Cash Equivalents
Restricted cash and cash equivalents as of December 31, 2017 and 2016, are as follows:
December 31, December 31, (in millions of Korean won) 2017 2016 Description Deposit restricted for government project Bank deposits \ 16,182 \ 19,809 and other.
Cash and cash equivalents in the statement of financial position equal to cash and cash equivalents in the statement of cash flows.
34 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
6. Trade and Other Receivables
Trade and other receivables as of December 31, 2017 and 2016, are as follows:
December 31, 2017
(in millions of Provision for Present value Carrying Korean won) Total amounts impairment discount amount Current assets Trade receivables \ 2,875,629 \ (403,512) \ (7,265) \ 2,464,852 Other receivables 321,683 (46,089) (132) 275,462 \ 3,197,312 \ (449,601) \ (7,397) \ 2,740,314 Total
Non-current assets Trade receivables \ 345,485 \ (296) \ (11,483) \ 333,706 Other receivables 427,393 (23) (25,405) 401,965 \ 772,878 \ (319) \ (36,888) \ 735,671 Total
December 31, 2016
(in millions of Provision for Present value Carrying Korean won) Total amounts impairment discount amount Current assets Trade receivables \ 2,734,325 \ (433,072) \ (4,640) \ 2,296,613 Other receivables 396,281 (102,504) (229) 293,548
Total \ 3,130,606 \ (535,576) \ (4,869) \ 2,590,161
Non-current assets Trade receivables \ 225,712 \ (296) \ (10,874) \ 214,542 Other receivables 433,376 (23) (25,850) 407,503
Total \ 659,088 \ (319) \ (36,724) \ 622,045
The fair values of trade and other receivables with original maturities less than one year equal to their carrying amount because the discounting effect is immaterial. The fair value of trade and other receivables with original maturities longer than one year, which are mainly from sales of goods, is determined discounting the expected future cash flow at the weighted average interest rate.
35 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Details of changes in provision for impairment for the years ended December 31, 2017 and 2016, are as follows:
2017 2016 (in millions of Korean won) Trade Other Trade Other receivables receivables receivables receivables Beginning \ 433,368 \ 102,527 \ 428,775 \ 200,790 Provision 32,631 97 74,891 6,168 Reversal or write-off (62,191) (56,512) (70,298) (104,431)
Ending \ 403,808 \ 46,112 \ 433,368 \ 102,527
Provision for impairment on trade and other receivables is recognized as operating expenses, other expenses and finance costs.
Details of aging analysis of trade receivables as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December 31, 2017 December 31, 2016
Neither past due nor impaired \ 2,504,670 \ 2,169,427 Past due and impaired
Up to 6 months 466,920 476,765 6 months to 12 months 58,456 69,908 Over 12 months 172,320 228,423 697,696 775,096 Less: Provision for impairment (403,808) (433,368)
Total \ 2,798,558 \ 2,511,155
Details of other receivables as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December 31, 2017 December 31, 2016 Loans \ 73,080 \ 73,682 Receivables 297,632 367,947 Accrued income 2,492 3,421 Refundable deposits 349,922 358,131 Others 413 397 Less: Provision for impairment (46,112) (102,527)
Total \ 677,427 \ 701,051
36 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Details of aging analysis of other receivables as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December 31, 2017 December 31, 2016 Neither past due nor impaired \ 603,114 \ 648,659 Past due and impaired
Up to 6 months 61,956 59,282 6 months to 12 months 14,092 6,473 Over 12 months 44,377 89,164 120,425 154,919 Less: Provision for impairment (46,112) (102,527)
Total \ 677,427 \ 701,051
The maximum exposure of trade and other receivables to credit risk is the carrying amount of each class of receivables mentioned above as of December 31, 2017.
7. Other Financial Assets and Liabilities
Details of other financial assets and liabilities as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December 31, 2017 December 31, 2016 Other financial assets Derivatives used for hedge \ 7,389 \ 214,648 Financial instruments 1 58,365 168,366 Available-for-sale financial assets 64,916 105,376 Less: Non-current (75,896) (198,777)
Current \ 54,774 \ 289,613
Other financial liabilities Financial liabilities at fair value through \ 5,051 \ 1,973 profit and loss Derivatives used for hedge 81,200 11,413 Less: Non-current (53,145) \ (13,386)
Current \ 33,106 \-
1 As of December 31, 2017, the Company’s financial instruments amounting to \ 8,365 million (December 31, 2016: \ 8,366 million), which consist of certain proceeds from the disposal of Ustream Inc. deposited in an escrow account, checking account deposits, and deposits for Win-win Growth Cooperative loans, are subject to withdrawal restrictions.
37 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Financial liabilities at fair value through profit or loss as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December 31, 2017 December 31, 2016 Financial liabilities held for trading
Other derivatives \ 5,051 \ 1,973
Total \ 5,051 \ 1,973
The valuation gains and losses on financial liabilities at fair value through profit or loss for the years ended December 31, 2017 and 2016, are as follows:
2017 2016 (in millions of Korean won) Valuation gains Valuation losses Valuation gains Valuation losses Other derivatives \ - \ 3,078 \ 33 \ - liabilities
Total \ - \ 3,078 \ 33 \ -
Derivatives used for hedge as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December 31, 2017 December 31, 2016 Assets Liabilities Assets Liabilities
Currency swap 1 \ 7,389 \ 81,200 \ 214,648 \ 11,413 Less: Non-current (4,675) (48,094) (87,095) (11,413)
Current \ 2,714 \ 33,106 \ 127,553 \ -
1 The currency swap contract is entered to hedge debentures cash flow fluctuation risk arising from fluctuation of interest rate and exchange rate, and the maximum expected period exposed to cash flow fluctuation risk due to the forecast transactions subject to hedge is September 7, 2034.
The full fair value of a hedging derivative is classified as a non-current asset or liability if the remaining maturity of the hedged item is more than 12 months and, as a current asset or liability, if the maturity of the hedged item is less than 12 months.
38 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
The valuation gains and losses on the derivatives contracts for the years ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 2016 Valuation Valuation Other Valuation Valuation Other gain loss comprehensive gain loss comprehensive income1 1 Type of Transaction income Currency swap \ - \ 187,468 \ (146,881) \ 97,158 \ - \ 84,636
1 Before adjustment of deferred income tax directly reflected in equity.
The Company recognized valuation loss of \ 2,018 million (2016: valuation gain \ 1,432 million) for the year ended December 31, 2017, as the ineffective portion of cash flow hedge in the statement of profit or loss.
Details of available-for-sale financial assets as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December 31, 2017 December 31, 2016 Marketable equity securities \ 85 \ 93 Non-marketable equity securities 59,931 98,083 Debt securities 4,900 7,200 Less : Non-current (64,916) (105,376)
Current \ - \ -
Changes in available-for-sale financial assets for the years ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 2016 \ Beginning 105,376 \ 75,170 Acquisition 3,776 41,757 Disposal (4,721) (11,741) Valuation1 (6) (215) Impairment (9) - Reclassification (39,500) 405
Ending \ 64,916 \ 105,376
1 Before adjustment of deferred income tax directly reflected in equity.
The maximum exposure of debt securities of available-for-sale financial assets to credit risk is the carrying amount as of December 31, 2017.
39 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Available-for-sale financial assets are measured at fair value. However, non-marketable equity securities that do not have quoted market prices in an active market and the fair value of which cannot be reliably measured are recognized at cost. When the reasonably estimated recoverable amounts of non-marketable securities are less than the carrying amounts, impairment loss is recognized.
Investment in Korea Software Financial Cooperative amounting to \ 1,000 million is provided as collateral for payment guarantees provided by Korea Software Financial Cooperative (Note 19).
8. Inventories
Inventories as of December 31, 2017 and 2016, are as follows:
December 31, 2017 December 31, 2016 (in millions of Acquisition Valuation Book Acquisition Valuation Book Korean won) cost allowance amount cost allowance amount Merchandise \ 284,090 \ (51,844) \ 232,246 \ 219,535 \ (41,439) \ 178,096
Cost of inventories recognized as expenses for the years ended December 31, 2017 and 2016 amount to \ 3,363,690 million and \ 3,074,569 million, respectively. Additionally, valuation loss on inventory amounts to \ 10,405 million for the years ended December 31, 2017 and reversal of valuation loss on inventory amounts to \ 18,466 million for the years ended December 31, 2016.
9. Other Assets and Liabilities
Other assets and liabilities as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December 31, 2017 December 31, 2016 Other assets Advance payments \ 55,242 \ 59,170 Prepaid expenses 147,923 158,149 Less: Non-current (27,952) (26,507)
Current \ 175,213 \ 190,812
Other liabilities Advances received \ 60,938 \ 81,565 Withholdings 21,210 19,835 Unearned revenue 14,072 14,564 Less: Non-current (19,492) (21,305)
Current \ 76,728 \ 94,659
40 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
10. Property and Equipment
Changes in property and equipment for the years ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 Buildings Telecommuni- and cations Construction Land structures equipment Others - in-progress Total Acquisition cost \ 912,387 \ 2,928,545 \ 33,472,178 \ 1,434,494 \ 678,425 \ 39,426,029 Less: Accumulated depreciation (including accumulated impairment loss (131) (1,355,088) (25,007,058) (1,101,938) (621) (27,464,836) and others) Beginning, net \ 912,256 \ 1,573,457 \ 8,465,120 \ 332,556 \ 677,804 \ 11,961,193 Acquisition and capital expenditure 1,948 16 202,058 103,321 2,087,248 2,394,591 Disposal and termination (568) (957) (170,307) (6,380) (3,086) (181,298) Depreciation - (102,036) (2,289,316) (110,984) - (2,502,336) Transfer to investment properties 26,763 25,306 1,735,479 4,486 (2,088,215) (296,181) Others (1,863) (703) 1,609 35 - (922) Ending, net \ 938,536 \ 1,495,083 \ 7,944,643 \ 323,034 \ 673,751 \ 11,375,047
Acquisition cost \ 938,667 \ 2,954,300 \ 33,910,943 \ 1,453,205 \ 674,864 \ 39,931,979 Less: Accumulated depreciation (including accumulated impairment loss (131) (1,459,217) (25,966,300) (1,130,171) (1,113) (28,556,932) and others)
(in millions of Korean won) 2016 Buildings Telecommuni- and cations Construction Land structures equipment Others - in-progress Total Acquisition cost \ 906,064 \ 2,825,403 \ 32,705,831 \ 1,508,459 \ 671,068 \ 38,616,825 Less: Accumulated depreciation (including accumulated impairment loss (131) (1,267,849) (24,046,929) (1,155,652) (1,300) (26,471,861) and others) Beginning, net \ 905,933 \ 1,557,554 \ 8,658,902 \ 352,807 \ 669,768 \ 12,144,964 Acquisition and capital expenditure 29 2,334 210,607 126,288 2,137,531 2,476,789 Disposal and termination (818) (1,481) (107,056) (6,078) (3,047) (118,480) Depreciation - (100,925) (2,314,066) (114,183) - (2,529,174) Transfer to investment properties 4,015 135,792 1,978,619 8,022 (2,126,448) - Others 3,097 (19,817) 38,114 (34,300) - (12,906) Ending, net \ 912,256 \ 1,573,457 \ 8,465,120 \ 332,556 \ 677,804 \ 11,961,193 Acquisition cost \ 912,387 \ 2,928,545 \ 33,472,178 \ 1,434,494 \ 678,425 \ 39,426,029 Less: Accumulated depreciation (including accumulated impairment loss (131) (1,355,088) (25,007,058) (1,101,938) (621) (27,464,836) and others)
41 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
The borrowing costs capitalized for qualifying assets amount to \ 7,190 million for the year ended December, 2017 (2016: \ 9,793 million). The interest rate applied to calculate the capitalized borrowing costs in 2017 is 3.37 % (2016: 3.38 %).
11. Investment Properties
Changes in investment properties for the years ended December 31, 2017 and 2016, are as follows:
(in millions of 2017 2016 Korean won) Land Buildings Total Land Buildings Total Acquisition cost \ 181,331 \ 870,476 \ 1,051,807 \ 182,216 \ 847,376 \ 1,029,592 Less: Accumulated - (388,822) (388,822) - (346,081) (346,081) depreciation Beginning, net 181,331 481,654 662,985 182,216 501,295 683,511 Depreciation - (31,221) (31,221) - (32,175) (32,175) Transfer from (to) 1,862 225 2,087 property, plant and (885) 12,534 11,649 equipment Ending, net \ 183,193 \ 450,658 \ 633,851 \ 181,331 \ 481,654 \ 662,985
Acquisition cost \ 183,193 \ 866,575 \ 1,049,768 \ 181,331 \ 870,476 \ 1,051,807 Less: Accumulated - (415,917) (415,917) - (388,822) (388,822) depreciation
The fair value of investment properties is \ 1,691,010 million as of December 31, 2017 (2016: \ 1,433,599 million). The fair value of investment properties is estimated based on the expected cash flow.
Rental income from investment properties is \ 208,407 million (2016 : \ 212,236 million) and direct operating expenses (including repairs and maintenance) arising from investment properties that generated rental income during the period are recognized as operating expenses.
Details of investment properties provided as collateral as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December 31, 2017 Collateral Carryingamount Secured amount Related account Related amount Land and Building \ 386,713 \ 74,603 Deposits received \ 64,342
(in millions of Korean won) December 31, 2016 Collateral Carryingamount Secured amount Related account Related amount Land and Building \ 384,081 \ 66,094 Deposits received \ 56,472
42 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
12. Intangible Assets
Changes in intangible assets for the years ended December 31, 2017 and 2016, are as follows:
2017 Frequency Industrial Development usage (in millions of Korean won) Goodwill rights costs(*) Software rights Others Total \ 65,057 \ 25,705 \ 1,545,032 \ 625,137 \ 2,522,269 \ 286,485 \ 5,069,685 Acquisition cost Less : Accumulated depreciation (including accumulated impairment loss - (14,406) (1,188,275) (502,236) (853,239) (173,980) (2,732,136) and others) \ 65,057 \ 11,299 \ 356,757 \ 122,901 \ 1,669,030 \ 112,505 \ 2,337,549 Beginning, net - 4,482 260,320 44,257 - 11,370 320,429 Acquisition and capital expenditure - (374) (14,806) (421) - (6,854) (22,455) Disposal and termination - (2,125) (159,953) (47,061) (310,868) (15,301) (535,308) Amortization \ 65,057 \ 13,282 \ 442,318 \ 119,676 \ 1,358,162 \ 101,720 \ 2,100,215 Ending, net Acquisition cost \ 65,057 \ 29,105 \ 1,714,859 \ 668,894 \ 2,522,269 \ 284,025 \ 5,284,209 Less : Accumulated depreciation (including accumulated impairment loss - (15,823) (1,272,541) (549,218) (1,164,107) (182,305) (3,183,994) and others) (*) The Company’s development costs mainly consist of acquisition costs to develop a combined billing system and an information management system.
2016 Frequency Industrial Development usage (in millions of Korean won) Goodwill rights costs Software rights Others Total Acquisition cost \ 65,057 \ 24,692 \ 1,537,556 \ 620,232 \ 2,760,182 \ 284,110 \5,291,829 Less : Accumulated depreciation (including accumulated impairment loss - (13,777) (1,056,535) (459,240) (1,796,562) (161,632) (3,487,746) and others) Beginning, net \ 65,057 \ 10,915 \ 481,021 \ 160,992 \ 963,620 \ 122,478 \ 1,804,083 Acquisition and capital expenditure - 2,794 45,203 14,558 978,309 15,965 1,056,829 Disposal and termination - (412) (8,600) (1,666) - (9,027) (19,705) Amortization - (1,998) (160,867) (50,983) (272,899) (16,120) (502,867) Impairment - - - - - (791) (791) Ending, net \ 65,057 \ 11,299 \ 356,757 \ 122,901 \ 1,669,030 \ 112,505 \ 2,337,549 Acquisition cost \ 65,057 \ 25,705 \ 1,545,032 \ 625,137 \ 2,522,269 \ 286,485 \ 5,069,685 Less : Accumulated depreciation (including accumulated impairment loss - (14,406) (1,188,275) (502,236) (853,239) (173,980) (2,732,136) and others)
43 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
The carrying amount of membership rights with indefinite useful life not subject to amortization is \ 66,356 million as of December 31, 2017 (2016: \ 66,530 million).
Goodwill impairment reviews are undertaken annually. The recoverable amount of all CGUs has been determined based on value-in-use calculations. These calculation use cash flow projections based on financial budgets approved by management covering a five-year period. Cash flows beyond the five- year period are extrapolated using the estimated growth rates. The growth rate does not exceed the long-term average growth rate included in industry report specific to the industry in which the CGU operates.
The Company determined the gross margin rate based on past performance and its expectations of market development. The average growth rates used are estimated based on the historical growth rate. In addition, the Company estimated the cash flow based on past performance and its expectation of market growth, and the discount rates used reflected specific risks relating to the relevant CGUs.
As a result of impairment test, the Company concluded that the carrying amount of CGUs does not exceed the recoverable amount of CGUs. Therefore, the Company did not recognize the impairment loss on goodwill for the years ended December 31, 2017 and 2016.
13. Investments in Subsidiaries, Associates and Joint ventures
Carrying amount in investments in subsidiaries, associates and joint ventures as of December 31, 2017 and 2016, is as follows:
(in millions of Korean won) December 31, 2017 December 31, 2016 Subsidiaries \ 3,317,738 \ 3,373,731
Associates and joint ventures 267,240 265,125
Total \ 3,584,978 \ 3,638,856
Investments in subsidiaries as of December 31, 2017 and 2016, are as follows:
Carrying amount Percentage of Location December 31, December 31, ownership (%) (in millions of Korean won) 2017 2016 KT Estate Inc. Korea 100.0% \ 1,084,522 \ 1,084,522 KT Sat Co., Ltd. Korea 100.0% 390,530 390,530 KTCS Corporation 1 Korea 7.6% 6,427 6,427 KTIS Corporation 1 Korea 30.1% 30,633 30,633 KT Skylife Co., Ltd. Korea 50.3% 311,696 311,696 BC Card Co., Ltd. Korea 69.5% 633,004 633,004 KT M&S Co., Ltd. Korea 100.0% 26,764 124,564 KT Hitel Co., Ltd. Korea 63.7% 120,078 120,078
44 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
KT Belgium Belgium 100.0% 86,432 69,461 KT Powertel Co., Ltd. 1 Korea 44.8% 37,419 37,419 Genie Music Corporation (KT Music Korea 42.5% 37,417 37,417 Corporation)1 Netherlan KTSC Dutch B.V 100.0% 55,847 55,847 ds KT Telecop Co., Ltd. Korea 86.8% 26,045 26,045 KT Submarine Co., Ltd. 2 Korea 39.3% 24,370 24,370 Nasmedia, Inc. 2 Korea 42.7% 23,051 23,051 KT New Business Fund No.1 Korea 90.9% 8,112 8,112 KT Strategic Investment Fund No.1 Korea 90.9% 20,000 20,000 KTDS Co., Ltd. Korea 95.5% 19,616 19,616 KTSB Data Service Korea 51.0% 18,870 18,870 KT Strategic Investment Fund No.2 Korea 90.9% 20,000 20,000 KT Sports Korea 66.0% 6,600 6,600 KT M mobile Co., Ltd. Korea 100.0% 200,000 200,000 KT Service Bukbu Co., Ltd. Korea 67.3% 7,092 7,089 KT Service Nambu Co., Ltd. Korea 76.4% 10,160 10,155 KT Strategic Investment Fund No.3 Korea 86.7% 13,000 6,500 KT Strategic Investment Fund No.4 Korea 95.0% 9,500 - PlayD Co., Ltd. (N Search Marketing Korea 33.3% 20,000 20,000 Co., Ltd.)3 Others Korea 70,553 61,725
Total \ 3,317,738 \ 3,373,731
1 At the end of the reporting period, although the Company and its subsidiaries own less than 50% ownership in this entity, this entity is deemed to be a Company’s subsidiary due to the dispersion of the non-controlling interests and voting patterns at the shareholders’ meetings in the past. 2 At the end of the reporting period, although the Company owns less than 50% ownership, these entities are deemed to be the Company’s subsidiaries as the Company holds the majority of voting right based on an agreement with other investors. 3 At the end of reporting period, Nasmedia, Inc., the Company's subsidiary, owns 66.7% ownership in this entity, and total ownership of the Company and the subsidiary is 100%. Therefore, this entity is deemed to be the Company's subsidiary.
45 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Investments in associates and joint ventures as of and for the years ended December 31, 2017 and 2016, are as follows:
Percentage of Carrying amount Location ownership (%) December 31, December 31, (in millions of Korean won) 2017 2016 KIF Investment Fund Korea 33.3% \ 115,636 \ 115,636 KT-SB Venture Investment Korea 50.0% 6,437 7,505 Fund 1 Mongolian Mongolia - - 11,135 Telecommunications 1 KT Wibro Infra Co., LTD 1 Korea - - 52,200 KT-IBKC Future Investment Korea 43.3% 9,750 3,250 Fund 11 KT-CKP New Media Korea 49.7% 1,530 4,500 Investment Fund K Bank Inc. 1 Korea 10.0% 63,043 - Others 70,844 70,889 Total \ 267,240 \ 265,125
1 At the end of reporting period, although the Company owns 50% ownership, the equity method accounting has been applied as the Company cannot participate in determining the operating and financial policies of those entities. As of December 31, 2017, the entire shares of Mongolian Telecommunications is classified as assets held for sale, and KTWibro Infra Co., Ltd. was liquidated during 2017. Also, 8% of non-voting convertible stock are excluded from percentage of ownership for K bank Inc.
Changes in investments in subsidiaries, associates and joint ventures for the years ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 2016 Beginning \ 3,638,856 \ 3,541,837 Acquisition 80,054 149,869 Disposal (64,498) (10,609) Impairment 1 (97,800) (42,241) Others 2 28,366 -
Ending \ 3,584,978 \ 3,638,856
1 During the year, the Company recognized impairment loss of \ 97,800 million in KT M&S Co., Ltd. During the prior year, the Company recognized impairment loss of \ 12,800 million, \ 6,574 million and \ 22,867 million in KT Wibro Infra Co., Ltd., KT Innoedu Co., Ltd. and Korea Telecom Japan Co., Ltd., respectively. 2 During the year, \ 36,500 million of K Bank and \ 3,000 million of GE Premier 1st Corporate Restructuring Real Estate Investment Trust Company are reclassified as investment in subsidiaries, associates and joint ventures, and the Company reclassified \ 11,135 million of Mongolian Telecommunications as assets held for sale.
46 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Marketable investments in subsidiaries, associates and joint ventures as of December 31, 2017 and 2016, are as follows:
December 31, 2017 Carrying amount Fair value Number of (in millions of (in millions of shares Korean won) Korean won) KT Skylife Co., Ltd. 23,908,000 \ 311,696 \ 321,563 KT Hitel Co., Ltd. 22,750,000 120,078 146,283 KT Submarine Co., Ltd. 8,085,000 24,370 35,534 Nasmedia, Inc. 3,742,406 23,051 278,809 KT Music Corporation 20,904,514 37,417 99,192 KTCS Corporation 3,177,426 6,427 7,213 KTIS Corporation 10,196,190 30,633 30,792
Total \ 553,672 \ 919,386
December 31, 2016 Carrying amount Fair value Number of (in millions of (in millions of shares Korean won) Korean won) KT Skylife Co., Ltd. 23,908,000 \ 311,696 \ 413,608 KT Hitel Co., Ltd. 22,750,000 120,078 148,785 KT Submarine Co., Ltd. 8,085,000 24,370 39,859 Nasmedia, Inc. 3,742,406 23,051 147,825 KT Music Corporation 20,904,514 37,417 75,361 KTCS Corporation 3,177,426 6,427 7,880 KTIS Corporation 10,196,190 30,633 37,726 Mongolian Telecommunications 10,348,111 11,135 3,940
Total \ 564,807 \ 874,984
47 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
14. Trade and Other Payables
Details of trade and other payable as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December 31, 2017 December 31, 2016 Current Liabilities Accounts payable \ 947,025 \ 802,251 Other payables 3,162,499 3,378,841
Total \ 4,109,524 \ 4,181,092
Non-current Liabilities Accounts payable \ - \ 1,499 Other payables 958,189 1,134,239
Total \ 958,189 \ 1,135,738
Details of other payables as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December 31, 2017 December 31, 2016 Non-trade payable \ 2,685,355 \ 2,973,345 Accrued expenses 532,316 609,530 Operating deposits 557,149 601,652 Others 345,868 328,553 Less: Non-current (958,189) (1,134,239)
Current \ 3,162,499 \ 3,378,841
15. Borrowings
Details of borrowings as of December 31, 2017 and 2016, are as follows:
Debentures
(in millions of Korean won and thousands of foreign currencies) December 31, 2017 December 31, 2016 Annual interest Foreign Korean Foreign Korean Type Maturity rates currency won currency won MTNP notes 1 Sept. 7, 2034 6.50% USD 100,000 107,140 USD 100,000 120,850 MTNP notes Jan 20, 2017 - - - USD 350,000 422,975 2 FR notes Aug. 28, 2018 LIBOR(3M)+1.15% USD 300,000 321,420 USD 300,000 362,550 MTNP notes Apr. 22, 2017 - - - USD 650,000 785,525 MTNP notes Apr. 22, 2019 2.63% USD 350,000 374,990 USD 350,000 422,975 MTNP notes Jan. 29, 2018 0.86% JPY 6,800,000 64,539 JPY 6,800,000 70,503
48 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
(in millions of Korean won and thousands of foreign currencies) December 31, 2017 December 31, 2016 Annual interest Foreign Korean Foreign Korean Type Maturity rates currency won currency won MTNP notes Feb. 23, 2018 0.48% JPY 15,000,000 142,367 JPY 15,000,000 155,522 MTNP notes July 18, 2026 2.50% USD 400,000 428,560 USD 400,000 483,400 MTNP notes Aug. 7, 2022 2.63% USD 400,000 428,560 - - The 173-2nd Public bond Aug. 6, 2018 6.62% - 100,000 - 100,000 The 177-3rd Public bond Feb. 9, 2017 - - - - 170,000 The 179th Public bond Mar. 29, 2018 4.47% - 260,000 - 260,000 The 180-2nd Public bond Apr. 26, 2021 4.71% - 380,000 - 380,000 The 181-2nd Public bond Aug. 26, 2018 3.99% - 90,000 - 90,000 The 181-3rd Public bond Aug. 26, 2021 4.09% - 250,000 - 250,000 The 182-2nd Public bond Oct. 28, 2021 4.31% - 100,000 - 100,000 The 183-2nd Public bond Dec. 22, 2021 4.09% - 90,000 - 90,000 The 183-3rd Public bond Dec. 22, 2031 4.27% - 160,000 - 160,000 The 184-1st Public bond Apr. 10, 2018 2.74% - 120,000 - 120,000 The 184-2nd Public bond Apr. 10, 2023 2.95% - 190,000 - 190,000 The 184-3rd Public bond Apr. 10, 2033 3.17% - 100,000 - 100,000 The 185-1st Public bond Sept. 16, 2018 3.46% - 200,000 - 200,000 The 185-2nd Public bond Sept. 16, 2020 3.65% - 300,000 - 300,000 The 186-1st Public bond June 26, 2017 - - - - 120,000 The 186-2nd Public bond June 26, 2019 3.08% - 170,000 - 170,000 The 186-3rd Public bond June 26, 2024 3.42% - 110,000 - 110,000 The 186-4th Public bond June 26, 2034 3.70% - 100,000 - 100,000 The 187-1st Public bond Sept. 2, 2017 - - - - 110,000 The 187-2nd Public bond Sept. 2, 2019 2.97% - 220,000 - 220,000 The 187-3rd Public bond Sept. 2, 2024 3.31% - 170,000 - 170,000 The 187-4th Public bond Sept. 2, 2034 3.55% - 100,000 - 100,000 The 188-1st Public bond Jan. 29, 2020 2.26% - 160,000 - 160,000 The 188-2nd Public bond Jan. 29, 2025 2.45% - 240,000 - 240,000 The 188-3rd Public bond Jan. 29, 2035 2.71% - 50,000 - 50,000 The 189-1st Public bond Jan. 27, 2019 1.76% - 100,000 - 100,000 The 189-2nd Public bond Jan. 27, 2021 1.95% - 130,000 - 130,000 The 189-3rd Public bond Jan. 27, 2026 2.20% - 100,000 - 100,000 The 189-4th Public bond Jan. 27, 2036 2.35% - 70,000 - 70,000 Total 5,927,576 7,834,300 Less : Current portion (1,297,794) (1,607,571) Discount on bonds (19,330) (20,434) Net \ 4,610,452 \ 5,656,295
1 As of December 31, 2017, the Company has outstanding notes in the amount of USD 100 million with fixed interest rates under Medium Term Note Program (“MTNP”) registered in the Singapore Stock Exchange, which allowed issuance of notes of up to USD 2,000 million. However, the MTN program has been suspended since 2007. 2 The Libor (3M) is approximately 1.695% as of December 31, 2017.
49 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Long-term Borrowings
(in millions of Korean Annual won) interest December December Financial institution Type Maturity rates 31, 2017 31, 2016
Export-Import Bank Inter-Korean Cooperation Fund 1 July 10, 2026 1.50% \ 4,688 \ 5,181 of Korea NH Investment & Long-term commercial papers Feb. 18, 2019 3.17% 300,000 300,000 Securities Co., Ltd.
Total 304,688 305,181
Less: Current portion (740) (493)
Net \ 303,948 \ 304,688
1 The above Inter-Korean Cooperation Fund is repayable in installments over 13 years after a seven-year grace period.
Repayment schedule of the Company’s debentures and borrowings as of December 31, 2017, is as follows:
(in millions of Korean won) Debentures Borrowings Korean In foreign Sub- In local currency Total won currency total Jan. 1 2018~Dec. 31, \ 770,000 \ 528,326 \ 1,298,326 \ 740 \ 1,299,066 2018 Jan. 1 2019~Dec. 31, 490,000 374,990 864,990 300,493 1,165,483 2019 Jan. 1 2020~Dec. 31, 460,000 - 460,000 493 460,493 2020 Jan. 1 2021~Dec. 31, 950,000 - 950,000 493 950,493 2021 Thereafter 1,390,000 964,260 2,354,260 2,469 2,356,729
Total \ 4,060,000 \ 1,867,576 \ 5,927,576 \ 304,688 \ 6,232,264
50 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Carrying amount and fair value of the Company’s debentures and borrowings as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December 31, 2017 December 31, 2016 Carrying Fair Carrying Fair Type amount value amount value Debentures \ 5,908,246 \ 5,962,569 \ 7,263,866 \ 7,327,085 Long-term borrowings 304,688 305,030 305,181 305,001 (Including the current portion)
Total \ 6,212,934 \ 6,267,599 \ 7,569,047 \ 7,632,086
The fair value of debentures and long-term borrowings are calculated by discounting the expected future cash flows at weighted average borrowing rate. The weighted average borrowing rate is approximately 3.37% as of December 31, 2017 (December 31, 2016: 3.38%).
16. Provisions
Changes in provisions for the years ended December 31, 2017 and 2016, are as follows:
2017
(in millions of Korean won) Litigation Restoration cost Others Total Beginning \ 18,235 \ 92,388 \ 73,772 \ 184,395 Increase(Transfer) 10 2,042 14,850 16,902 Usage (1,740) (1,519) (21,906) (25,165) Reversal (2,269) (1,523) (10,940) (14,732)
Ending \ 14,236 \ 91,388 \ 55,776 \ 161,400
Current portion \ 14,236 \ - \ 53,244 \ 67,480 Non-current portion - 91,388 2,532 93,920
2016 (in millions of Korean won) Litigation Restoration cost Others Total Beginning \ 17,524 \ 82,190 \ 83,639 \ 183,353 Increase(Transfer) 2,589 12,320 37,880 52,789 Usage (640) (1,733) (36,928) (39,301) Reversal (1,238) (389) (10,819) (12,446)
Ending \ 18,235 \ 92,388 \ 73,772 \ 184,395
Current portion \ 18,235 \ - \ 73,772 \ 92,007 Non-current portion - 92,388 - 92,388
51 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
17. Net Defined Benefit Liability
The amounts recognized in the statements of financial position are determined as follows:
(in millions of Korean won) December 31, 2017 December 31, 2016
Present value of defined benefit obligations \ 1,436,666 \ 1,285,300 Less : Fair value of plan assets (1,134,347) (1,000,369)
Liabilities in the statement of financial position \ 302,319 \ 284,931
Changes in the defined benefit obligations for the years ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 2016
Beginning \ 1,285,300 \ 1,231,234 Current service cost 122,140 124,923 Interest expense 30,449 30,153 Benefits paid (97,522) (69,460) Remeasurements: Actuarial gains and losses arising - (54,641) from changes in demographic assumptions Actuarial gains and losses arising 45,425 23,019 from changes in financial assumptions Actuarial gains and losses arising 50,874 72 from experience adjustments
Ending \ 1,436,666 \ 1,285,300
Changes in the fair value of plan assets for the years ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 2016 Beginning \ 1,000,369 \ 801,298 Interest income 23,698 19,624
Remeasurements: (4,857) (2,001) Employer contributions 200,000 237,500 Benefits paid (84,863) (56,052)
Ending \ 1,134,347 \ 1,000,369
52 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Amounts recognized in the statements of profit or loss for the years ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 2016 Current service cost \ 122,140 \ 124,923 Net interest expense 6,751 10,529 Transfer out (9,731) (10,595)
Total expense \ 119,160 \ 124,857
Principal actuarial assumptions were as follows:
December 31, 2017 December 31, 2016
Discount rate 2.82% 2.42% Future salary increases 5.35% 4.45%
The sensitivity of the defined benefit obligations as of December 31, 2017, to changes in the principal assumptions is:
(in millions of Korean won) Effect on defined benefit obligation Changes in Increase in Decrease in assumption assumption assumption
Discount rate 0.5%p \ (53,606) \ 56,969 Future salary growth rate 0.5%p 51,656 (49,225)
A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the plans’ bond holdings.
The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. The sensitivity of the defined benefit obligation to changes in principal actuarial assumptions is calculated using the projected unit credit method, the same method applied when calculating the defined benefit obligations recognized on the statement of financial position.
The Company actively monitors how the duration and the expected yield of the investments match the expected cash outflows arising from the pension obligations. A large portion of assets is invested in equity instruments, and the majority of equities are in a diversified portfolio of domestic blue chip entities.
53 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
The Company reviews the funding level on an annual basis and has a policy of eliminating deficit from the fund.
Expected contributions to post-employment benefit plans for the year ending December 31, 2018, are \ 119,085 million.
The expected maturity analysis of undiscounted pension benefits as at December 31, 2017, is as follows:
Less than Between 1-2 Between 2-5 (in millions of Korean won) 1 year years years Over 5 years Total
Pension benefits \ 58,194 \ 95,898 \ 421,422 \ 3,055,383 \ 3,630,897
The weighted average duration of the defined benefit obligations is 7.9 years.
18. Defined Contribution Plan
Recognized expense related to the defined contribution plan for the year ended December 31, 2017, is \ 35,640 million (2016: \ 36,991 million).
19. Commitments and Contingencies
As of December 31, 2017, major commitments with local financial institutions are as follows:
(in millions of Korean won Financial institution Currency Limit Used amount and thousands of foreign currencies) Bank overdraft Kookmin Bank and others KRW 1,720,000 72 NH Investment & Commercial papers Securities Co., Ltd. and KRW 370,000 300,000 others Export-Import Bank of Inter-Korean Cooperation Fund KRW 37,700 4,688 Korea Green energy factoring Shinhan Bank KRW 16 16 Collateralized loan on accounts Shinhan Bank and others KRW 340,000 42,184 receivable –trade Plus electronic notes payable Industrial Bank of Korea KRW 50,000 140 Forward trading commitment Shinhan Bank USD 11,500 -
As of December 31, 2017, guarantees received from financial institutions are as follows:
(in millions of Korean won Financial institution Currency Limit and thousands of foreign currencies) 15,000 Comprehensive line of credit KEB Hana Bank KRW
54 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
(in millions of Korean won Financial institution Currency Limit and thousands of foreign currencies) Export-Import Bank of Korea 7,414 Guarantee for advances received USD 87,442 Bid guarantee KRW 267,193 Contract and warranty guarantee Korea Software Financial Cooperative KRW 92,718 Prepayment and other guarantee KRW 54,072 Kookmin Bank and others USD Guarantees for bonds payable in foreign currency 23,000 KEB Hana Bank PLN 1
16,505 Performance guarantee KRW 4,051 Guarantee for licensing KRW Seoul Guarantee Insurance 1,370 Guarantee for deposits KRW 50 Auction guarantee KRW
1 Polish zloty.
The Company is jointly and severally obligated with KT Sat Co., Ltd. to pay KT Sat Co., Ltd.’s liabilities prior to spin-off. As of December 31, 2017, the Company and KT Sat Co., Ltd. are jointly and severally liable for reimbursement of \ 4,328 million.
For the year ended December 31, 2017, the Company entered into agreements with the Securitization Specialty Companies (2017: Olleh KT Thirty-first to Thirty-sixth Securitization Specialty Co., Ltd., 2016: Olleh KT Twenty-fifth to Twenty-sixth Securitization Specialty Co., Ltd., GiGA LTE Twenty- seventh to Thirtieth Securitization Specialty Co., Ltd.) and disposed of its trade receivables related to handset sales. The Company also made asset management agreements with each securitization specialty company and will receive the related management fees.
As of December 31, 2017, the Company is a defendant in 156 lawsuits with an aggregate amount of \ 92,747 million. As of December 31, 2017, litigation provisions of \ 14,236 million for various pending lawsuits and unasserted claims are recorded as liabilities for potential loss in the ordinary course of business. The final outcome of the case cannot be estimated as at the end of the reporting period.
Asia Broadcast Satellite Holdings(ABS), Ltd. sued the Controlling Company and its subsidiary, KT Sat, at the International Court of Arbitration of the International Chamber of Commerce(ICC) on December 31, 2013, for the ownership and compensation of damages due to the sales contract of the satellite KOREASAT. In addition, ABS sued the Controlling Company and its subsidiary, KT Sat, at the International Centre for Dispute Resolution of the American Arbitration Association on December 24, 2013, for the compensation of damages from relocation of equipment and the breach of entrustment contract. These two cases are merged into one by ICC, and the arbitration is in progress. On July 2017, ICC made partial judgement that ABS has ownership of KOREASAT 3 satellite. Regarding the judgement, as joint defendants of this arbitration, the Controlling Company
55 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
and its subsidiary, KT Sat Co., Ltd. filed a lawsuit for cancellation of the arbitration to the Court of Appeals in United States of America. At the end of the reporting period, the final outcome of these claims cannot be reasonably estimated.
According to the financial and other covenants included in certain debentures and borrowings, the Company is required to maintain certain financial ratios such as debt-to-equity ratio, use the funds for the designated purpose and report to the creditors periodically. The covenant also contains restriction on provision of additional collateral and disposal of certain assets.
At the end of the reporting period, the Company is offering construction completion guarantee agreement to development of Nonsan Hwagidong apartment complex. When the date of payment for borrowing comes up in between November 24, 2017 and to August 9, 2019, the Company collaterally guarantees the debt of AbleNS 1st Co. up to \ 9,000 million.
At the end of the reporting period, the Company participates in Algerie Sidi Abdela new town development consortium with 2.5% of interest and has joint liability with other consortium participants.
At the end of the reporting period, contract amount of property, plant and equipment acquisition agreement made but not yet recognized as liabilities amounts to \ 619,628 million (2016: \ 412,133 million).
20. Lease
Finance Lease
Details of finance lease assets as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December 31, 2017 December 31, 2016 Acquisition costs \ 319,052 \ 291,708 Less : Accumulated depreciation (120,046) (99,421)
Net balance \ 199,006 \ 192,287
As of December 31, 2017, the Company recognized finance lease assets as other property and equipment. The related depreciation amounted to \ 57,833 million (2016: \ 49,993 million) for the year ended December 31, 2017.
Details of future minimum lease payments as of December 31, 2017 and 2016, under finance lease contracts are summarized below:
(in millions of Korean won) December 31, 2016 December 31, 2015 Total minimum lease payments Within one year \ 88,338 \ 79,551
56 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
From one year to five years 131,954 131,797 Over five years 81 -
Total \ 220,373 \ 211,348
Unrealized interest expense \ 43,656 \ 30,719
Net amount of minimum lease payments Within one year 68,648 64,008 From one year to five years 107,989 116,621 Over five years 80
Total \ 176,717 \ 180,629
Operating Lease
Details of future minimum lease payments as of December 31, 2017 and 2016, under operating lease contracts are summarized below:
(in millions of Korean won) December 31, 2017 December 31, 2016 Within one year \ 104,966 \ 98,021 From one year to five years 259,093 267,437 Over five years - 16,549
Total \ 364,059 \ 382,007
Operating lease expenses incurred for the years ended December 31, 2017 and 2016, amounted to \ 121,140 million and \ 112,330 million, respectively.
21. Share Capital
As of December 31, 2017 and 2016, the Company’s number of authorized shares is one billion.
December31,2017 December31,2016 Par value Number of Par value Ordinary shares Number of Ordinary shares per share outstanding per share (in millions of outstanding (in millions of (in Korean shares (in Korean won) Korean won) shares Korean won) won) Ordinary shares1 261,111,808 \ 5,000 \ 1,564,499 261,111,808 \ 5,000 \ 1,564,499 1 The Company retired 51,787,959 treasury shares against retained earnings. Therefore, the ordinary shares amount differs from the amount resulting from multiplying the number of shares issued by \ 5,000 par value per share of ordinary share.
57 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
22. Retained Earnings
Details of retained earnings as December 31, 2017 and 2016, are as follows:
December 31, 2017 December 31, 2016 Legal reserve 1 \ 782,249 \ 782,249 Voluntary reserves 2 4,651,362 4,651,362 Unappropriated retained earnings 3,910,895 3,722,593
Total \ 9,344,506 \ 9,156,204
1 The Commercial Code of the Republic of Korea requires the Company to appropriate, as a legal reserve, an amount equal to a minimum of 10% of cash dividends paid until such reserve equals 50% of its issued share capital. The reserve is not available for the payment of cash dividends, but may be transferred to share capital with the approval of the Company’s Board of Directors or used to reduce accumulated deficit, if any, with the ratification of the Company’s majority shareholders. 2 The provision of research and development of human is separately accumulated with tax reserve fund during earned surplus disposal by Tax Reduction and Exemption Control Act of Korea. Reversal of this provision can be paid out as dividends according to related tax law.
The appropriation of retained earnings for the year ended December 31, 2017, is expected to be appropriated at the shareholders’ meeting on March 23, 2018. The appropriation date for the year ended December 31, 2016 was March 24, 2017.
The appropriation of retained earnings for the years ended December 31, 2017 and 2016, is as follows:
(in millions of Korean won) Note 2017 2016 Unappropriated retained earnings from prior year \ 3,524,304 \ 2,890,865 Remeasurements of net defined benefit liabilities (76,677) 22,398 Profit for the year 463,268 809,330 Retained earnings available for appropriation 3,910,895 3,722,593
Reversal of voluntary reserve - - Appropriation of loss on disposal of treasury stock (2,046) (2,312) Dividends (Cash dividend (%): Ordinary shares: 31 (245,097) (195,977) \ 1,000 (20.0%) in 2017 \ 800 (16.0%) in 2016) Appropriation of retained earnings (247,143) (198,289)
Retained earnings after appropriation \ 3,663,752 \ 3,524,304
58 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
23. Accumulated Other Comprehensive Income and Other Components of Equity
As of December 31, 2017 and 2016, the details of the Company’s accumulated other comprehensive income are as follows:
(in millions of Korean won) December 31, 2017 December 31, 2016 Gain on valuation of available-for-sale \ - \ 5 Loss on derivatives valuation (1,502) (32,096)
Total \ (1,502) \ (32,091)
Changes in accumulated other comprehensive income for the years ended December 31, 2017 and 2016, are as follows:
2017 (in millions of Reclassification Beginning Increase/decrease Ending Korean won) to gain or loss Gain(loss) on valuation of \ 5 \ (5) \ - \ - available-for-sale Gain(loss) on derivatives (32,096) (111,335) 141,929 (1,502) valuation
Total \ (32,091) \ (111,340) \ 141,929 \ (1,502) 2016 (in millions of Reclassification Beginning Increase/decrease Ending Korean won) to gain or loss Gain(loss) on valuation of \ 3,110 \ (164) \ (2,941) \ 5 available-for-sale Gain(loss) on derivatives (20,380) 64,155 (75,871) (32,096) valuation
Total \ (17,270) \ 63,991 \ (78,812) \ (32,091)
As of December 31, 2017 and 2016, the other components of equity are as follows:
December31,2017 December31,2016 Treasury stock 1 \ (853,108) \ (859,789) Loss on disposal of treasury stock 2 (2,046) (2,312) Share-based payments 6,483 5,762 Other (188,012) (188,012)
Total \ (1,036,683) \ (1,044,351)
1 During the year ended December 31, 2017, the Company granted 125,412 treasury shares as share- based payment. 2 The amounts directly reflected in equity is \ 653 million (2016: \ 738 million) as of December 31, 2017.
59 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
As of December 31, 2017 and 2016, details of treasury stock are as follows:
December31,2017 December31,2016 Number of shares 16,014,753 16,140,165 Amounts (in millions of Korean won) \ 853,108 \ 859,789
Treasury stock is expected to be used for the stock compensation for the Company’s directors and employees, and other purposes.
24. Share-based Payments
Details of other share-based payments as of December 31, 2017 and 2016, are as follows:
11th grant
Grant date July,27, 2017 Grantee CEOs, inside directors, outside directors, executives Vesting conditions Service condition: 1 year Non-market performance condition: achievement of performance Fair value per option (in Korean won) \ 34,400 Total compensation costs (in Korean won) \ 6,483 million Estimated exercise date (exercise date) During 2018 Valuation method Fair value method
Changes in the number of other share-based and the weighted-average price exercise price as of payments in 2017 and 2016 are as follows:
2017 Number of shares Beginning Grant Expired Exercised1 Ending exercisable
10th grant 318,506 - 193,094 125,412 - - 11th grant - 316,949 - - 316,949 -
Total 318,506 316,949 193,094 125,412 316,949 -
60 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
2016 Number of shares Beginning Grant Expired Exercised1 Ending exercisable
9th grant 263,123 54,913 181,685 136,351 - - 10th grant - 318,506 - - 318,506 -
Total 263,123 373,419 181,685 136,351 318,506 -
1 The weighted average price of ordinary shares at the time of exercise during 2017 was \ 31,797 (2016: \ 31,750).
25. Operating Revenues
Operating revenues for the years ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 2016 Services provided \ 14,586,234 \ 14,755,901 Sales of goods 2,755,082 2,272,967
Total \ 17,341,316 \ 17,028,868
26. Operating Expenses
Operating expenses for the years ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 2016 Salaries and wages \ 2,066,574 \ 2,022,667 Depreciation 2,492,051 2,518,167 Amortization of intangible assets 524,480 487,216 Commissions 1,521,954 1,520,069 Interconnection charges 641,790 691,153 International interconnection fee 214,580 217,812 Purchase of inventories 3,428,244 2,906,959 Changes of inventories (54,149) 149,144 Sales commission 2,257,083 2,123,234 Service Cost 620,435 585,609 Purchase of contents 453,948 407,767 Utilities 304,439 306,628 Taxes and dues 247,432 220,677 Rent 434,282 431,166 Insurance premium 59,521 166,471
61 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Installation fee 415,015 391,305 Advertising expenses 184,874 182,840 Research and development expenses 170,095 165,720 Others 406,507 474,673
Total \ 16,389,155 \ 15,969,277
Details of employee benefits for the years ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 2016 Short-term employee benefits \ 1,901,031 \ 1,846,022 Post-employment benefits (defined benefit) 119,160 124,857 Post-employment benefits (defined 35,640 36,691 contribution) Post-employment benefits (others) 3,083 7,387 Share-based payment 7,660 7,710
Total \ 2,066,574 \ 2,022,667
27. Other Income and Other Expenses
Other income for the years ended, consists of:
(in millions of Korean won) 2017 2016 Gain on disposal of property and equipment \ 17,739 \ 36,909 Gain on disposal of intangible assets 11,028 3,780 Compensation on property and equipment 124,630 81,735 Gain on disposal of investments in subsidiaries, 519 21 associates and joint ventures Dividends received 139,447 172,764 Gains on government subsidies 26,021 19,146 Others 70,869 199,572
Total \ 390,253 \ 513,927
Other expenses for the years ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 2016 Loss on disposal of property and equipment \ 172,473 \ 108,169 Loss on disposal of intangible assets 15,857 11,479 Impairment loss on intangible assets - 791
62 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Loss on disposal of investments in subsidiaries, 4,849 1,092 associates and joint ventures Impairment loss on investments in subsidiaries, 97,800 42,241 associates and joint ventures Donation 72,260 63,110 Others 142,734 98,566 Total \ 505,973 \ 325,448
28. Financial Income and Costs
Details of financial income for the years ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 2016 Interest income \ 72,656 \ 98,260 Foreign currency transaction gain 73,588 19,377 Foreign currency translation gain 200,672 11,367 Gain on settlement of derivatives - 8,329 Gain on valuation of derivatives - 97,158 Others 4,708 22,525
Total \ 351,624 \ 257,016
Details of financial costs for the years ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 2016 Interest expenses \ 282,243 \ 318,926 Foreign currency transaction loss 16,299 21,147 Foreign currency translation loss 11,590 114,172 Loss on settlement of derivatives 58,569 - Loss on valuation of derivatives 187,468 - Loss on disposal of trade receivables 19,389 15,838 Others 115 407
Total \ 575,673 \ 470,490
63 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
29. Deferred Income Tax and Income Tax Expense
The analyses of deferred tax assets and deferred tax liabilities as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December31,2017 December31,2016 Deferred tax assets Deferred tax assets to be recovered \ 261,118 \ 238,732 within 12 months Deferred tax assets to be recovered 797,725 764,250 after more than 12 months 1,028,843 1,002,982 Deferred tax liabilities Deferred tax liability to be recovered (128) (47,584) within 12 months Deferred tax liability to be recovered (606,970) (554,052) after more than 12 months (607,098) (601,636)
Deferred tax assets, net \ 421,745 \ 401,346
The gross movements on the deferred income tax account for the years ended December 31, 2017 and 2016, are calculated as follows:
(in millions of Korean won) 2017 2016 Beginning \ 401,346 \ 556,488 Charged to the statement of profit or loss 5,685 (152,723) Charged to other comprehensive income 14,714 (2,419)
Ending \ 421,745 \ 401,346
The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows:
(in millions of Korean won) 2017 Other Statement of Beginning comprehensive Ending profit or loss income Deferred tax liabilities Investment in subsidiaries, \ (1,234) \ (221) \ - \ (1,455) associates and joint ventures Derivative instruments (48,705) 48,705 - - Depreciation (37,971) 37,971 - - Deposits for severance benefits (242,089) (69,856) - (311,945) Deferred tax gain on disposal of (233,614) (22,909) - (256,523) fixed assets
64 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Accrued income (369) 273 - (96) Gain or loss foreign currency - (11,605) - (11,605) translation Others (37,653) 12,180 - (25,473) \ (601,635) \ (5,462) \ - \ (607,097) Deferred tax assets Provision for impairment on trade \ 92,425 \ 10,610 \ - \ 103,035 receivables Available-for-sale financial assets 14,132 1,547 2 15,681 Contribution for construction 9,462 181 - 9,643 Derivative instruments - 32,301 (9,767) 22,534 Depreciation - 1,669 - 1,669 Accrued expenses 53,796 10,710 - 64,506 Provisions 22,266 (3,012) - 19,254 Defined benefit liabilities 311,043 59,561 24,480 395,084 Withholding of facilities expenses 6,910 472 - 7,382 Accrued payroll expenses 43,541 (11,407) - 32,134 Deduction of instalment receivables 13,897 (13,897) - - Present value discount 2,809 775 - 3,584 Assets retirement obligation 17,376 2,771 - 20,147 Gain or loss foreign currency 67,558 (67,558) - - translation Deferred revenue 26,141 379 - 26,570 Tax credit carryforwards 199,599 (48,823) - 150,776 Others 122,026 34,867 - 156,893 1,002,981 11,146 14,715 1,028,842
Net balance \ 401,346 \ 5,684 \ 14,715 \ 421,745
(in millions of Korean won) 2016
Other Statement of Beginning comprehensive Ending profit or loss income
Deferred tax liabilities Investment in subsidiaries, associates \ - \ (1,234) \ - \ (1,234) and joint ventures Derivative instruments (18,877) (33,569) 3,741 (48,705) Depreciation (54,245) 16,274 - (37,971) Deposits for severance benefits (192,984) (49,105) - (242,089) Deferred tax gain on disposal of (239,619) 6,005 - (233,614) fixed assets Accrued income (238) (130) - (368) Others (30,591) (7,064) - (37,655) \ (536,554) \ (68,823) \ 3,741 \ (601,636)
65 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Deferred tax assets Investment in subsidiaries, associates \ 1,874 \ (1,874) \ - \ - and joint ventures Provision for impairment on trade 118,892 (26,466) - 92,426 receivables Available-for-sale financial assets 18,099 (4,959) 991 14,131 Contribution for construction 10,989 (1,527) - 9,462 Accrued expenses 45,649 8,147 - 53,796 Provisions 22,287 (21) - 22,266 Defined benefit liabilities 283,253 34,940 (7,151) 311,042 Withholding of facilities expenses 7,360 (450) - 6,910 Accrued payroll expenses 39,376 4,165 - 43,541 Deduction of instalment receivables 10,523 3,374 - 13,897 Present value discount 4,479 (1,670) - 2,809 Assets retirement obligation 16,264 1,113 - 17,377 Gain or loss foreign currency 43,140 24,418 - 67,558 translation Deferred revenue 42,868 (16,729) - 26,139 Tax credit carryforwards 214,012 (14,413) - 199,599 Tax loss carryforwards 107,485 (107,485) - - Others 106,492 15,537 - 122,029 1,093,042 (83,900) (6,160) 1,002,982
Net balance \ 556,488 \ (152,723) \ (2,419) \ 401,346
The total of unrecognized temporary differences as deferred tax liabilities at the end of the reporting date is \ 52,340 million (2016: \ 66,085 million) related to investment in subsidiaries, associates and joint ventures, and the total of unrecognized temporary differences as deferred tax assets at the end of the reporting date is \ 97,800 million related to investment in subsidiaries, associates and joint ventures
The tax impact recognized directly to equity as of December 31, 2017 and 2016, are as follows:
2017 2016 (in millions of Before After Before After Tax effect Tax effect Korean won) recognition recognition recognition recognition Available-for-sale \ (6) \ 1 \ (5) \ (4,095) \ 991 \ (3,104) valuation gain (loss) Hedge instruments 40,361 (9,767) 30,594 (15,458) 3,741 (11,717) valuation gain (loss) Remeasurements of net defined benefit (101,156) 24,480 (76,676) 29,550 (7,151) 22,399 liabilities Total \ (60,801) \ 14,714 \ (46,087) \ 9,997 \ (2,419) \ 7,578
66 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Details of income tax benefit for the years ended December 31, 2017 and 2016, are calculated as follows:
(in millions of Korean won) 2017 2016 Current income tax expenses \ 154,809 \ 72,543 Impact of change in temporary difference (5,685) 152,723
Total income tax expense (benefit) \ 149,124 \ 225,266
The tax on the Company’s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the entities as follows:
(in millions of Korean won) 2017 2016 Loss before income tax benefit \ 612,392 \ 1,034,596 Expected tax expense at statutory tax rate \ 147,737 \ 249,910 Tax effects of Income not subject to tax (15,911) (28,149) Expenses not deductible for tax purposes 36,839 10,047 Tax credit carryforwards and deductions (24,113) (13,626) Deferred tax effects due to consolidated tax return (11,475) (15,368) Others 16,047 22,452
Income tax expense \ 149,124 \ 225,266
Average effective tax rate 24.4% 21.8%
30. Earnings per Share
Basic earnings per share is calculated by dividing the profit for the period by the weighted average number of ordinary shares outstanding during the year, excluding ordinary shares purchased by the Company and held as treasury stock.
Basic earnings per share for the years ended December 31, 2017 and 2016, is calculated as follows:
2017 2016 Profit attributable to ordinary shares \ 463,268 \ 809,330 (in millions of Korean won) Weighted average number of 245,017,175 244,892,313 ordinary shares outstanding Basic earnings per share (in Korean won) 1,891 3,305
Diluted earnings per share from operations is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has dilutive potential ordinary shares from other share-based payments.
67 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Diluted earnings per share for the years ended December 31, 2017 and 2016, is calculated as follows:
2017 2016 Profit attributable to ordinary shares \ 463,268 \ 809,330 (in millions of Korean won) Adjusted profit for the year attributable to ordinary shares (in 463,268 809,330 millions of Korean won) Number of dilutive potential ordinary shares outstanding 79,880 84,245 Weighted-average number of ordinary shares outstanding 245,097,055 244,976,558 and dilutive ordinary shares Diluted earnings per share (in Korean won) 1,890 3,304
Diluted earnings per share is calculated by dividing adjusted profit for the period by the sum of the number of ordinary shares and dilutive potential ordinary shares.
31. Dividends
The dividends paid by the Company in 2017 were \ 195,977 million (\ 800 per share). The dividends paid by the Company in 2016 were \ 122,425 million (\ 500 per share). A dividend in respect of the year ended December 31, 2017, of \ 1,000 per share, amounting to a total dividend of \ 245,097million, is to be proposed at the shareholders’ meeting on March 23, 2018.
32. Cash Generated from Operations
Cash flows from operating activities for the years ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 2016 1. Profit for the year \ 463,268 \ 809,330 2. Adjustments for: Incometaxexpense 149,124 225,266 Interestincome (72,656) (98,260) Interestexpense 282,243 318,926 Dividendsincome (139,448) (172,962) Depreciation 2,533,557 2,561,349 Amortizationofintangibleassets 535,308 502,867 Provisions for post-employment benefits (defined benefits) 128,891 135,452 Impairmentlossesontradereceivables 32,728 81,059 Loss on disposal of subsidiaries, associates 4,330 1,071 and joint ventures Impairment loss on interests in associates and 97,800 42,241 joint arrangements Lossondisposalofpropertyandequipment 154,734 71,260 Lossondisposalofintangibleassets 4,829 7,699 Impairmentlossonintangibleassets - 791 Loss (gain) on foreign currency translation (189,082) 102,805 Loss(gain)onvaluationofderivatives,net 249,114 (105,520)
68 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Impairmentlossonavailableforsale 9 - Gainondisposalofavailable-for-salesecurities (4,690) (22,326) Others (74,889) 76,685 3. Changes in operating assets and liabilities Decrease(increase)intradereceivables (326,599) 315,905 Decreaseinotherreceivables 22,924 10,999 Decrease(increase) in other current assets (6,750) 9,877 Decrease(increase) in other non-current assets (1,445) 4,422 Decrease(increase) in inventories (65,891) 155,704 Increase(decrease)intradepayables 150,640 (155,317) Increaseinotherpayables 35,527 56,740 Decrease in other current liabilities (20,889) (32,337) Increase(decrease) in other non-current liabilities (1,812) 8,465 Decrease in accrued provisions (16,999) (14,085) Decrease in deferred revenue (11,659) (69,179) Post-employmentbenefitspaid(definedbenefits) (77,422) (69,106) Increase in plan assets (133,851) (182,631)
4. Cash generated from operations(1+2+3) \ 3,700,944 \ 4,577,190
The Company made agreements with securitization specialty companies and disposed of its trade receivables related to handset sales (Note 19). Cash flows from the disposals are presented in cash generated from operations.
Significant transactions not affecting cash flows for the years ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 2016 Reclassification of the current portion of debentures \ 1,357,243 \ 1,567,936 Reclassification of construction-in-progress 2,088,215 2,126,448 to property and equipment Reclassification of accounts payable from property and (197,573) (15,038) equipment Reclassification of accounts payable from intangible assets (222,388) 673,630 Reclassification of accounts payable from net defined 20,100 354 liability Reclassificationofaccountspayablefromplanassets 18,714 1,183
69 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
33. Changes in Liabilities Arising from Financing Activities
Changes in liabilities arising from financial activities for the periods ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 Non-cash Beginning Cash flows Newly Exchange Fair value Other Ending acquired difference change changes Borrowing \ 7,569,047 \ (1,106,920) \ - \ (197,075) \ - \ (52,118) \ 6,212,934 Financial lease liabilities 180,629 (71,575) 68,939 - - (1,276) 176,717 Derivative assets 214,648 (71,370) - (63,882) 2,687 (74,694) 7,389 Derivative liabilities 13,386 - - 120,974 (27,369) (20,740) 86,251 Total \ 7,977,710 \ (1,249,865) \ 68,939 \ (139,983) \ (24,682) \ (148,828) \ 6,483,291
34. Related Party Transactions
The list of subsidiaries of the Company as of December 31, 2016, is as follows:
Relationship Name of Entry Subsidiaries KT Hitel Co., Ltd., Ktcs Corporation, Ktis Corporation, KT Service Bukbu Co., Ltd., KT Service Nambu Co., Ltd., KT Powertel Co., Ltd., KT Linkus Co., Ltd., KT Telecop Co., Ltd., KTDS Co., Ltd., Nasmedia, Inc., KT M Hows Co., Ltd., KT M&S Co., Ltd., GENIE Music Corporation(KT Music Corporation), KT Estate Inc., KT Skylife Co., Ltd., H&C Network, KTSB Data service, KT Sat Co., Ltd., KT Submarine Co., Ltd., KT Sports Co., Ltd., KT New Business Fund No.1, KT Strategic Investment Fund No.1, KT Strategic Investment Fund No.2, KT Music Contents Fund 1, Korea Telecom America, Inc., Korea Telecom Japan Co., Ltd., Korea Telecom China Co., Ltd., KT Dutch B.V., PT. KT Indonesia, KT AMC, KT Commerce Inc., BC Card Co., Ltd., VP Inc., BC Card China Co., Ltd., Skylife TV Co., Ltd., Initech Co., Ltd., Smartro Co., Ltd., East Telecom LLC, Super iMax LLC, NEXR Co., Ltd., KT Rwanda Networks Ltd., KT Belgium, KT ORS Belgium, KT-Michigan Global Contents Fund, Autopion Co., Ltd., KBTO sp.zo.o, Africa Olleh Services Ltd., KT M mobile, KT investment Co., Ltd, PT. BCCard Asia Pacific, Whowho&Company Co., Ltd., KT Hongkong Telecommunications Co., Ltd., KT Strategic Investment Fund No.3 , PlayD Co., Ltd. (N search Marketing Co., Ltd.), KT Hong Kong Limited, Korea Telecom Singapore Pte, Ltd. Texno Pro Sistem, KT Music Contents Fund No.2, KT Strategic Investment Fund No.4 Associates and Korea Information & Technology Investment Fund., K-REALTY CR REIT 1, KT-SB joint ventures Venture Investment Fund, Boston Global Film & Contents Fund L.P., QTT Global (Group) Company Limited, CU Industrial Development Co., Ltd, PHI Healthcare Inc. (HooH Healthcare Inc.), KD Living, Inc., MOS GS Co., Ltd., MOS Daegu Co., Ltd., MOS Chungcheong Co., Ltd., MOS Gangnam Co., Ltd., MOS GB Co., Ltd., MOS BS Co., Ltd., MOS Honam Co., Ltd., Oscar Ent. Co., Ltd., Texno Pro Sistem, KT-CKP New Media Investment Fund, LoginD Co., Ltd., NgeneBio, K Bank Inc., K-REALTY CR-REIT
70 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Relationship Name of Entry 6, ISU-kth Contents Fund L.P., Daiwon Broadcasting Co., Ltd., KT-DSC creative economy youth start-up investment fund, Gyeonggi-KT Green Growth Fund, Korea Electronic Vehicle Charging Service, PT.MitraTransaksiIndonesia, K-REALTY RENTAL HOUSING REIT 2, AI RESEARCH INSTITUTE, kt-ibkc future investment fund 1, Gyeonggi-KT Yoojin Superman Fund, FUNDA Co., Ltd, CHAMP IT Co.,Ltd., GE Premier 1st Corporate Restructuring Real Estate Investment Trust Company, Alliance Internet Corp. Others1 KT ENGCORE Co., Ltd.
1 Although the entity is not the related party of the Company in accordance with Korean IFRS 1024, the entity belongs to the Large Enterprise Group to which the Company also belongs in accordance with the Monopoly Regulation and Fair Trade Act.
Outstanding balances of receivables and payables in relation to transaction with related parties as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December 31, 2017 Receivables Payables Trade Other Trade Other Loans receivables receivables payables payables Subsidiaries KT Linkus Co., Ltd. \ 1,240 \ - \ 13 - \ 14,565 KT Telecop Co., Ltd. 798 - 95 1,222 2,441 Ktcs Corporation 1,682 50 - - 45,913 Ktis Corporation 2,330 - 4,834 51 35,762 KT Service Bukbu Co., Ltd. 11 - 8 - 17,729 KT Service Nambu Co., Ltd. - - 5 - 18,608 KT Skylife Co., Ltd. 858 - 4,281 - 13,713 Skylife TV Co., Ltd. 416 3,000 - - 2,403 KTDS Co., Ltd. 1,114 - 812 - 91,409 KT Estate Inc. 934 - 43,102 - 39,857 BC Card Co., Ltd.1 5,451 - 11 5,887 1,313 KT Sat Co., Ltd. 330 - - - 2,352 KT Hitel Co., Ltd. 1,886 - 21 14,176 8,174 KT Commerce Inc. 253 - 44 14,346 84,443 KT M Hows Co., Ltd. - - 356 - 2,621 KT M&S Co., Ltd. 243 - 57 - 65,086 GENIE Music Corporation ( KT 19 497 - - 5,654 Music Corporation) KT M mobile 6,479 - - - 6,979 Nasmedia, Inc. 8,049 - 3 - 1,310
71 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
(in millions of Korean won) December 31, 2017 Receivables Payables Trade Other Trade Other Loans receivables receivables payables payables Others 5,942 1,461 1,161 420 9,273 Associates K-REALTY CR REIT 1 - - 33,800 - - MOS GS Co., Ltd. 9 - - - 392 MOS Daegu Co., Ltd. 1 - - - 1,388 MOS Chungcheong Co., Ltd. 1 - 290 - 1,753 MOS Gangnam Co., Ltd. 4 - 1 - 287 MOS GB Co., Ltd. 5 - 1 - 778 MOS BS Co., Ltd. 18 - 1 - 26 MOS Honam Co., Ltd. 1 - 1 - 384 K Bank, Inc. - - 138 - - NgeneBio 2 1 1,900 - - - Others 14 - 1 - 701 Others KT ENGCORE Co., Ltd. 4,983 - 2,861 12,488 103,686
Total \ 43,550 \ 6,411 \ 91,916 \ 48,590 \ 579,900
1 As of December 31, 2017, \ 1,092 million of the unsettled amount (2016: \ 1,116 million) in credit card transaction with BC Card Co., Ltd. is included in trade payables. 2 It is the amount after excluded from consolidation during the year.
(in millions of Korean won) December 31, 2016 Receivables Payables Trade Other Trade Other Loans receivables receivables payables payables Subsidiaries KT Linkus Co., Ltd. \ 2,806 \ - \ 7 \ - \ 11,391 KT Telecop Co., Ltd. 771 - 110 5 4,095 Ktcs Corporation 1,746 74 34 - 37,343 Ktis Corporation 2,645 - 4,064 - 40,512 KT Service Bukbu Co., Ltd. 49 - 28 - 18,377 KT Service Nambu Co., Ltd. 52 - 1 - 18,805 KT Skylife Co., Ltd. 1,959 - 243 - 10,727 Skylife TV Co., Ltd. 4 3,000 3 - 2,276 KTDS Co., Ltd. 204 - 8,372 - 116,079 KT Estate Inc. 2,447 - 43,427 - 45,772 BC Card Co., Ltd. 378 - 5,786 - 1,139
72 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
(in millions of Korean won) December 31, 2016 Receivables Payables Trade Other Trade Other Loans receivables receivables payables payables KT Sat Co., Ltd. 311 - 36 - 3,639 KT Hitel Co., Ltd. 503 - 1,954 17,803 7,178 KT Commerce Inc. 192 - 8 9,544 72,353 KT M Hows Co., Ltd. 114 - 8 - 3,357 KT M&S Co., Ltd. 24 - 102 - 83,674 KT Music Corporation - - 562 - 6,707 KT M mobile 3,354 - 640 - 6,158 Nasmedia, Inc. 7,742 - 2 - 1,427 Others 11,622 2,660 3,135 - 46,104 Associates KT WiBro Infra Co., Ltd. - - - - 43,394 K-REALTY CR REIT 1 - - 33,110 - - MOS GS Co., Ltd. 9 - 1 - 1,481 MOS Daegu Co., Ltd. 1 - - - 1,082 MOS Chungcheong Co., Ltd. 6 - 1 - 2,043 MOS Gangnam Co., Ltd. 5 - 1 - 1,114 MOS GB Co., Ltd. 2 - 1 - 2,164 MOS BS Co., Ltd. 17 - 1 - 1,094 MOS Honam Co., Ltd. 1 - - - 1,289 Others 70 - 179 2 302 Others KT ENGCORE Co., Ltd. 6,042 - 4,173 2,338 134,496
Total \ 43,076 \ 5,734 \ 105,989 \ 29,692 \ 725,572
Significant transactions with related parties for the years ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 Sales Purchases Operating Other Operating Others1 revenue income expenses Subsidiaries KT Linkus Co., Ltd. \ 8,814 \ 27 \ 65,929 \ 338 KT Telecop Co., Ltd. 11,885 4 8,847 5,238 KTCS Corporation 60,843 72 301,775 52,128
73 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
(in millions of Korean won) 2017 Sales Purchases Operating Other Operating Others1 revenue income expenses KTIS Corporation 64,790 21 278,818 59,192 KT Service Bukbu Co., Ltd. 14,489 5 185,530 1,900 KT Service Nambu Co., Ltd. 13,067 9 217,085 841 KT Skylife Co., Ltd. 24,138 39 46,096 - Skylife TV Co., Ltd. 4,957 90 9,774 - KTDS Co., Ltd. 13,889 1 240,309 144,424 KT Estate Inc. 8,164 7 170,139 4,622 BC Card Co., Ltd. 6,963 3 21,949 5,525 KT Sat Co., Ltd. 4,705 - 20,761 4 KT Hitel Co., Ltd. 12,064 3 50,035 5,547 KT Commerce Inc. 1,277 - 183,400 183,462 KT M Hows Co., Ltd. 978 4 1,742 - KT M&S Co., Ltd. 505,905 45 190,383 216,414 GENIE Music Corporation ( KT 1,888 - 36,137 189 Music Corporation) KT M mobile 56,158 - 9,522 38,808 Others 22,260 313 58,979 1,077
Associates K-REALTY CR REIT 1 - - 35,532 - MOS GS Co., Ltd. 594 - 15,135 1,811 MOS Daegu Co., Ltd. 220 - 7,580 934 MOS Chungcheong Co., Ltd. 303 - 13,888 1,019 MOS Gangnam Co., Ltd. 265 - 14,971 1,409 MOS GB Co., Ltd. 705 - 20,060 1,591 MOS BS Co., Ltd. 201 - 15,495 462 MOS Honam Co., Ltd. 372 - 13,220 1,074 K Bank, Inc. 1,991 - 46 - NgeneBio 2 2 30 - - Others 296 123 4,644 - Others KT ENGCORE Co., Ltd. 687 - 112,443 167,033 Total \ 842,870 \ 796 \ 2,350,224 \ 895,042
1 The amount for acquisition of tangible assets, etc. are included. 2 It is the amount after excluded from consolidation during the year.
74 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
(in millions of Korean won) 2016 Sales Purchases Operating Other Operating Others1 revenue income expenses Subsidiaries KT Linkus Co., Ltd. \ 10,121 \ 38 \ 65,111 \ 742 KT Telecop Co., Ltd. 13,562 - 17,778 217 KTCS Corporation 54,947 - 299,327 41,521 KTIS Corporation 59,251 - 276,008 45,447 KT Service Bukbu Co., Ltd. 14,225 - 172,968 952 KT Service Nambu Co., Ltd. 15,095 - 203,792 243 KT Skylife Co., Ltd. 20,814 26 42,920 11 KTDS Co., Ltd. 14,364 - 245,605 163,244 KT Estate Inc. 7,104 - 163,227 7,270 BC Card Co., Ltd. 12,279 - 19,595 - KT Sat Co., Ltd. 4,342 - 19,979 12 KT Hitel Co., Ltd. 8,273 - 57,140 6,959 KT M Hows Co., Ltd. 1,251 - 387,953 309 KT Commerce Inc. 1,019 - 2,363 - KT M&S Co., Ltd. 455,648 918 193,328 166,240 KT Music Corporation 4,025 - 32,983 1,771 KT M mobile 47,028 - 3,348 23,824 Smart Channel Co., Ltd. 2 439 - - - Others 35,070 585 67,260 2,908
Associates KT WiBro Infra Co., Ltd. 11 - - 391 Smart Channel Co., Ltd. 3 766 - - - K-REALTY CR REIT 1 - - 37,469 - MOS GS Co., Ltd. 564 - 15,019 2,241 MOS Daegu Co., Ltd. 191 - 10,857 1,091 MOS Chungcheong Co., Ltd. 265 - 11,335 1,481 MOS Gangnam Co., Ltd. 256 - 14,146 1,540 MOS GB Co., Ltd. 606 - 19,417 2,188 MOS BS Co., Ltd. 189 - 13,985 1,075 MOS Honam Co., Ltd. 285 - 12,944 1,174 Others 89 100 3,670 - Others KT ENGCORE Co., Ltd. 664 5 77,749 306,532
75 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
(in millions of Korean won) 2016 Sales Purchases Operating Other Operating Others1 revenue income expenses
Total \ 782,743 \ 1,672 \ 2,487,276 \ 779,383
1 The amount for acquisition of tangible assets, etc. are included 2 It is the amount after included and before excluded from consolidation during the prior year. 3 It is the amount before included from consolidation during the prior year.
Key management compensation for the years ended December 31, 2017 and 2016, consists of:
(in millions of Korean won) 2017 2016 Salaries and other short-term benefits \ 2,879 \ 2,629 Post-employment benefits 311 381 Stock-based compensation 1,331 1,237
Total \ 4,521 \ 4,247
Fund transactions with related parties for the years ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 Equity Loan transactions Dividend contributions in income Loans Repayments cash Subsidiaries Ktcs Corporation \ 60 \ 84 \ - \ 254 KT Linkus Co., Ltd - - 150 - KT Submarine Co., Ltd. - - - 404 KTIS Corporation - - - 816 KT Skylife Co., Ltd. - - - 9,922 KTDS Co., Ltd. - - - 5,904 KT Estate Inc. - - - 46,854 BC Card Co., Ltd. - - - 67,310 Nasmedia,Inc. - - - 1,460 KT Commerce Inc. - - - 326 KBTO Sp.z o. o. 4,127 4,036 5,978 - KT Strategic Investment - - 6,500 - Fund No.3
76 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
(in millions of Korean won) 2017 Equity Loan transactions Dividend contributions in income Loans Repayments cash KT Music Contents - - 2,000 - Investment Fund No.2 KT Strategic Investment - - 9,500 - Fund No.4 KT Music Contents - - 1,050 - Investment Fund No.1 KT Belgium - - 16,971 - Autopion Co., Ltd. 1,461 1,400 - - Associates and jointly controlled entities K-REALTY CR REIT 1 - - - 5,392 kt-ibkc future investment - - 6,500 - fund 1 K Bank, Inc. - - 26,543 - Others - - 1,865 805
Total \ 5,648 \ 5,520 \ 77,057 \ 139,447
(in millions of Korean won) 2016 Equity Loan transactions Dividend contributions in income Loans Repayments cash Subsidiaries Ktcs Corporation \ - \ 87 \ - \ 318 Autopion Co., Ltd. - 100 - - KT M Hows Co., Ltd. - - 3,450 - KT-Michigan Global Contents - - 6,280 - Fund KT HONG KONG TELECOMMUNICATIONS - - 460 - CO. LIMITED KT Innoedu Co., Ltd.1 - - 1,034 - KT Submarine Co., Ltd. - - - 404 Ktis Corporation - - - 1,020 KT Skylife Co., Ltd. - - - 8,368 KTDS Co., Ltd. - - - 7,920 KT Estate Inc. - - - 29,408 BC Card Co., Ltd. - - - 101,883 KT Sat Co., Ltd. - - - 14,500 Nasmedia,Inc. - - - 1,347 KBTO Sp.z.o.o. 1,937 - 1,295 -
77 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
(in millions of Korean won) 2016 Equity Loan transactions Dividend contributions in income Loans Repayments cash KT Strategic Investment - - 6,500 - Fund No.3 KT M mobile - - 100,000 - N SEARCH MARKETING - - 20,000 - Corp Associates and jointly controlled entities KT-DSC creative economy youth start-up investment - - 3,600 - fund AI RESEARCH INSTITUTE - - 3,000 - kt-ibkc future investment - - 3,250 - fund 1 Gyeonggi-KT Yoojin - - 1,000 - Superman Fund K-REALTY CR REIT 1 - - - 4,186 KIF-IMM IT Investment Fund - - - 3,201 Others - - - 66
Total \ 1,937 \ 187 \ 149,869 \ 172,621
1 During the year ended December 31, 2016, the Company invested \ 1,034 million in kind.
At the end of the reporting period, the Company entered into a credit card agreement with a limit of \ 4,817 million (2016: \ 4,707 million) with BC Card Co., Ltd.
35. Financial Risk Management
(1) Financial Risk Factors
The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance. The Company uses derivatives to hedge certain financial risk exposures such as fair value risk and cash flow risk.
The Company’s financial policy is set up in the long-term perspective and annually reported to the Board of Directors. The financial risk management is carried out by the Value Management Office, which identifies, evaluates and hedges financial risks. The treasury department in the Value Management Office considers various market conditions to estimate the effect from the market changes.
78 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
(1) Market risk
The Company’s market risk management focuses on controlling the extent of exposure to the risk in order to minimize revenue volatility. Market risk is a risk that decreases value or profit of the Company’s portfolio due to changes in market interest rate, foreign exchange rate and other factors.
i) Sensitivity analysis
Sensitivity analysis is performed for each type of market risk to which the Company is exposed. Reasonably possible changes in the relevant risk variable such as prevailing market interest rates, currency rates, equity prices or commodity prices are estimated and if the rate of change in the underlying risk variable is stable, the Company does not alter the chosen reasonably possible change in the risk variable. The reasonably possible change does not include remote or ‘worst case’ scenarios or ‘stress tests’.
ii) Foreign exchange risk
The Company is exposed to foreign exchange risk arising from operating, investing and financing activities. Foreign exchange risk is managed within the range of the possible effect on the Company's cash flows. Foreign exchange risk not affecting the Company’s cash flows is not hedged but can be hedged at a particular situation.
As of December 31, 2017 and 2016, if the foreign exchange rate had strengthened/weakened by 10% with all other variables held constant, the effects on profit before income tax and equity would have been as follows:
Fluctuation of (in millions of Korean won) Income before tax Equity foreign exchange rate + 10% \ (5,948) \ (3,089) 2017. 12. 31 - 10% 5,948 3,089 + 10% \ (6,792) \ (2,475) 2016. 12. 31 - 10% 6,792 2,475
The above analysis is a simple sensitivity analysis which assumes that all the variables other than foreign exchange rates are held constant. Therefore, the analysis does not reflect any correlation between foreign exchange rates and other variables, nor the management’s decision to decrease the risk.
79 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Details of financial assets and liabilities in foreign currencies as of December 31, 2017 and 2016, are as follows:
(in thousands of December31,2017 December31,2016 foreign currencies) Financial assets Financial liabilities Financial assets Financial liabilities USD \ 126,588 \ 1,652,424 \ 120,270 \ 2,271,980 SDR 306 738 311 737 JPY - 21,800,000 - 21,800,000 MMK 84 - 2,750 - EUR 175 12 38 153 DZD 47 - 471 - HKD - - 254 - BDT 38,074 - 69,473 - PLN 338 - 106,025 - RWF 3,346 - 1,203 - UZS 136,787 - 39,531 - VND 311,649 - 515,412 - TZS 317,348 - 29,987 - BWP 42 - 15 -
iii) Price risk
As of December 31, 2017, the Company is exposed to equity securities price risk because the securities held by the Company are traded in active markets. If the market prices had increased/decreased by 10% with all other variables held constant, the effects on profit before income tax and equity would have been as follows:
(in millions of Korean won) Fluctuation of price Income before tax Equity +10% \ - \ 9 2017. 12. 31 -10% - (9) +10% \ - \ 9 2016. 12. 31 -10% - (9)
The above analysis is based on the assumption that the equity index had increased/decreased by 10% with all other variables held constant and all the Company’s marketable equity instruments had moved according to the historical correlation with the index. Gain or loss on equity securities classified as available-for-sale financial assets can increase or decrease equity.
80 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
iv) Cash flow and fair value interest rate risk
The Company’s interest rate risk arises from liabilities in foreign currency such as foreign currency debentures. Debentures in foreign currency issued at variable rates expose the Company to cash flow interest rate risk which is partially offset by swap transactions. Debentures and borrowings issued at fixed rates expose the Company to fair value interest rate risk. The Company sets the policy and operates to minimize the uncertainty of the changes in interest rates and financial costs.
As of December 31, 2017 and 2016, if the market interest rate had increased/decreased by 100bp with other variables held constant, the effects on profit before income tax and equity would be as follows:
Fluctuation of (in millions of Korean won) Income before tax Equity interest rate + 100 bp \ 291 \ 3,356 2017. 12. 31 - 100 bp (303) (3,686) + 100 bp \ 170 \ 1,233 2016. 12. 31 - 100 bp (181) (1,374) The above analysis is a simple sensitivity analysis which assumes that all the variables other than market interest rates are held constant. Therefore, the analysis does not reflect any correlation between market interest rates and other variables, nor the management’s decision to decrease the risk.
(2) Credit risk
Credit risk is managed on the Company basis with the purpose of minimizing financial loss. Credit risk arises from the normal transactions and investing activities, where clients or other party fails to discharge an obligation on contract conditions. To manage credit risk, the Company considers the counterparty’s credit based on the counterparty’s financial conditions, default history and other important factors.
Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as outstanding receivables. To minimize such risk, only the financial institutions with strong credit ratings are accepted.
81 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
As of December 31, 2017 and 2016, maximum exposure to credit risk is as follows:
December 31, 2017 December 31, 2016 Cash equivalents(except for cash on hand) \ 1,165,532 \ 1,601,383 Trade and other receivables 1 3,475,985 3,212,206 Other financial assets Derivate used for hedge 7,389 214,648 Financial instruments 58,365 168,366 Available-for-sale financial assets 4,900 7,200
Total \ 4,712,171 \ 5,203,803
(3) Liquidity risk
The Company manages its liquidity risk by liquidity strategy and plans. The Company considers the maturity of financial assets and financial liabilities and the estimated cash flows from operations.
The table below analyzes the Company’s liabilities(including interest expenses) into relevant maturity groups based on the remaining period at the report date to the contractual maturity date and these amounts are contractual undiscounted cash flows:
December 31, 2017 (in millions of Korean won) Less than 1 year 1-5 years More than 5 years Total Trade and other payables \ 4,144,455 \ 914,052 \ 158,106 \ 5,216,613 Borrowings(including 1,474,485 3,488,074 2,317,203 7,279,762 debentures) Others1 13,328 - - 13,328 Total \ 5,632,268 \ 4,402,126 \ 2,475,309 \ 12,509,703
December 31, 2016 (in millions of Korean won) Less than 1 year 1-5 years More than 5 years Total Trade and other payables \ 4,214,212 \ 1,073,968 \ 216,025 \ 5,504,205 Borrowings(including 1,821,587 4,490,006 2,458,719 8,770,312 debentures) Others1 6,004 - - 6,004 Total \ 6,041,803 \ 5,563,974 \ 2,674,744 \ 14,280,521
1 It consists of the maximum limit related to joint responsibility and agreement of assumption of debts. The cash flows on agreement are classified based on the earliest period that the agreement can be executed. (Note 19)
82 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
As of December 31, 2017 and 2016, cash outflow and inflow of derivatives settled gross or net are undiscounted contractual cash flow and can differ from the amount in the financial statements.
December 31, 2017 (in millions of Korean won) Less than 1 year 1-5 years More than 5 years Total Outflows \ 588,914 \ 407,503 \ 526,633 \ 1,523,050 Inflows 557,858 428,339 509,558 1,495,755
December 31, 2016 (in millions of Korean won) Less than 1 year 1-5 years More than 5 years Total Outflows \ 1,135,472 \ 987,107 \ 535,942 \ 2,658,521 Inflows 1,258,354 1,091,053 588,419 2,937,826
(2) Management of Capital Risk
The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
The Company’s capital structure consists of liabilities including borrowings, cash and cash equivalents, and shareholders’ equity. The treasury department monitors the Company’s capital structure and considers cost of capital and risks related each capital component.
The Company’s debt-to-equity ratios as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won, %) December31,2017 December31,2016 Total liabilities \ 12,023,845 \ 13,615,818 Total equity 11,311,078 11,084,519 Debt-to-equity ratio 106% 123%
The Company manages capital on the basis of the gearing ratio. The ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the statement of financial position plus net debt.
The Company’s gearing ratios as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won, %) December 31, 2017 December 31, 2016 Total borrowings \ 6,212,934 \ 7,569,047 Less: cash and cash equivalents (1,166,402) (1,602,397) Net debt 5,046,532 5,966,650 Total equity 11,311,078 11,084,519 Total capital 16,357,610 17,051,169
83 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Gearing ratio 31% 35%
(3) Offsetting Financial Assets and Financial Liabilities
Details of the Company’s recognized financial assets subject to enforceable master netting arrangements or similar agreements are as follows:
(in millions of December 31, 2017 Net amounts Amounts not offset Gross presented in the Gross Korean won) liabilities statement of Financial Cash Net amount assets offset financial instruments collateral position Derivate used for \ 3,284 \ - \ 3,284 \ (3,284) \ - \ - hedge 1
Trade receivables 2 76,292 - 76,292 (73,438) - 2,854
Total \ 79,576 \ - \ 79,576 \ (76,722) \ - \ 2,854
(in millions of December 31, 2016 Net amounts Amounts not offset Gross presented in the Gross Korean won) liabilities statement of Financial Cash Net amount assets offset financial instruments collateral position Derivate used for \ 35,334 \ - \ 35,334 \ (5,707) \ - \ 29,627 hedge1
Trade receivables 2 95,847 - 95,847 (91,662) - 4,185
Total \ 131,181 \ - \ 131,181 \ (97,369) \ - \ 33,812
1 Netting arrangements under the standard contract of International Swap and Derivatives Association (ISDA). 2 Netting arrangements with reference to the offers of telecommunication facility interconnection and sharing data among telecommunication companies.
Details of the Company’s recognized financial assets subject to enforceable master netting arrangements or similar agreements are as follows:
84 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
(in millions of December 31, 2017 Net amounts Amounts not offset presented in the Gross Gross assets Korean won) statement of Financial Cash Net amount liabilities offset financial instruments collateral position Derivate used for \ 26,135 \ - \ 26,135 \ (3,284) \ - \ 22,851 hedge 1
Trade payables 2 75,283 - 75,283 (73,438) - 1,845
Total \ 101,418 \ - \ 101,418 \ (76,722) \ - \ 24,696
(in millions of December 31, 2016 Net amounts Amounts not offset presented in the Gross Gross assets Korean won) statement of Financial Cash Net amount liabilities offset financial instruments collateral position Derivate used for \ 5,707 \ - \ 5,707 \ (5,707) \ - \ - hedge 1
Trade payables 2 92,374 - 92,374 (91,662) - 712
Total \ 98,081 \ - \ 98,081 \ (97,369) \ - \ 712
1 Netting arrangements under the standard contract of ISDA (International Swap and Derivatives Association). 2 Netting arrangements with reference to the offers of telecommunication facility interconnection and sharing data among telecommunication companies.
85 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
36. Fair Value
(1) Fair Value by Financial Instruments Category
Carrying amounts and fair values of the financial assets and financial liabilities by category as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December31,2017 December31,2016 Carrying Carrying Fair value Fair value amount amount Financial assets Cash and cash equivalents1 \ 1,166,402 \ 1,166,402 \ 1,602,397 \ 1,602,397 Trade and other receivables1 3,475,985 3,475,985 3,212,206 3,212,206 Other financial assets Derivative used for hedge 7,389 7,389 214,648 214,648 Other financial instruments1 58,365 58,365 168,366 168,366 Available-for-sale financial 85 85 93 93 assets2
\ 4,708,226 \ 4,708,226 \ 5,197,710 \ 5,197,710
Financial liabilities Trade and other payables1 \ 5,067,712 \ 5,067,712 \ 5,316,830 \ 5,316,830 Borrowings 6,212,934 6,267,599 7,569,047 7,632,086 Other financial liabilities Derivative used for hedge 81,200 81,200 11,413 11,413 Other derivative financial 5,051 5,051 1,973 1,973 liability
\ 11,366,897 \ 11,421,562 \ 12,899,263 \ 12,962,302
1 An additional measurement of fair value is not performed because the carrying amount is a reasonable approximation of fair value. 2 Investments in equity instruments that do not have a quoted market price in an active market, and whose fair value cannot be reliably measured are not included and these are measured at cost.
86 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
(2) Financial Instruments Measured at Cost
The details of Available-for-sale financial assets measured at historical cost as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December 31, 2017 December 31, 2016
K-Bank \ - \ 36,500 IBK-AUCTUS Green Growth Private Equity Fund 8,518 9,506 WALDEN No.6 Fund 4,670 4,710 TRANSLINK No.2 Fund 9,395 9,395 Storm IV Fund 8,453 7,550 CBC II Fund 7,298 8,601 Others 26,497 29,021
Total \ 64,831 \ 105,283
The range of estimated cash flows is significant and the probabilities of the various estimates cannot be reasonably assessed and therefore, these instruments are measured at cost.
The Company does not have any plans to dispose of the above-mentioned equities instruments in the near future. These instruments will be measured at fair value when the Company can develop a reliable estimate of the fair value.
(3) Fair Value Hierarchy
Assets measured at fair value or for which the fair value is disclosed are categorized within the fair value hierarchy, and the defined levels are as follows:
Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1).
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, prices) or indirectly (that is, derived from prices) (Level 2).
Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).
87 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Fair value hierarchy classifications of the financial assets and financial liabilities that are measured at fair value or its fair value is disclosed as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December 31, 2017 Level 1 Level 2 Level 3 Total Assets Recurring fair value measurements Other financial assets Derivative used for hedging \ - \ 7,389 \ - \ 7,389 Available-for-sale financial assets 85 - - 85 85 7,389 - 7,474
Disclosed fair value Investment in subsidiaries, 919,386 - - 919,386 associates and joint ventures Investment property 1 - - 1,691,010 1,691,010 919,386 - 1,691,010 2,610,396 Total \ 919,471 \ 7,389 \ 1,691,010 \ 2,617,870
Liabilities Recurring fair value measurements Other financial liabilities Derivative used for hedging \ - \ 63,475 \ 17,725 \ 81,200 Otherderivativefinancialliability - - 5,051 5,051 - 63,475 22,776 86,251 Disclosed fair value Borrowings - - 6,267,599 6,267,599 - - 6,267,599 6,267,599 Total \ - \ 63,475 \ 6,290,375 \ 6,353,850
(in millions of Korean won) December 31, 2016 Level 1 Level 2 Level 3 Total Assets Recurring fair value measurements Other financial assets Derivative used for hedging \ - \ 214,648 \ - \ 214,648 Available-for-sale financial assets 93 - - 93 93 214,648 - 214,741
88 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Disclosed fair value Investment in subsidiaries, 874,984 - - 874,984 associates and joint ventures Investment property 1 - - 1,433,599 1,433,599 874,984 - 1,433,599 2,308,583 Total \ 875,077 \ 214,648 \ 1,433,599 \ 2,523,324
Liabilities Recurring fair value measurements Other financial liabilities Derivative used for hedging \ - \ 11,413 \ - \ 11,413 Otherderivativefinancialliability - - 1,973 1,973 - 11,413 1,973 13,386 Disclosed fair value Borrowings - - 7,632,086 7,632,086 - - 7,632,086 7,632,086 Total \ - \ 11,413 \ 7,634,059 \ 7,645,472
1 The highest and best use of a non-financial asset does not differ from its current use.
(4) Transfers between Fair Value Hierarchy Levels of Recurring Fair Value Measurements
There are no transfers between Level 1 and Level 2 of the fair value hierarchy for the recurring fair value measurements.
Details of changes in Level 3 of the fair value hierarchy for the recurring fair value measurements are as follows:
(in millions of Korean won) December 31, 2017 Derivative Other derivative financial financial assets for hedging purposes liabilities Beginning balance \ - \ 1,973 Amount recognized in 19,634 3,078 profit or loss1 Amount recognized in other comprehensive (1,909) - income Ending balance \ 17,725 \ 5,051
1 Profit of loss from derivatives used for hedging consist of gains or losses on valuation of derivatives
89 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
(in millions of Korean won) December 31, 2016 Derivative Other derivative financial financial assets for hedging purposes liabilities Beginning balance \ - \ 2,006 Amount recognized in - (33) profit or loss1 Amount recognized in other comprehensive - - income Ending balance \ - \ 1,973
1 Profit or loss from other derivatives consist of gain on sale. 2 Profit of loss from derivatives used for hedging consist of gains or losses on valuation of derivatives.
(5) Valuation Technique and the Inputs
Valuation techniques and inputs used in the recurring, non-recurring fair value measurements and disclosed fair values categorized within Level 2 and Level 3 of the fair value hierarchy as of December 31, 2017 and 2016, are as follows:
(in millions of Korean won) December 31, 2017 Fair value Level Valuation techniques Assets Recurring fair value measurements Other financial assets Derivative used for hedging \ 7,389 2 DCF Model Disclosed fair value Investmentproperties 1,691,010 3 DCF Model Liabilities Recurring fair value measurements Other financial liabilities 63,475 2 DCF Model Derivative used for hedging 17,725 3 Hull-White model DCF Model, Otherderivativefinancialliability 5,051 3 Comparable Company Analysis Disclosed fair value Borrowings 6,267,599 3 DCF Model
(in millions of Korean won) December 31, 2016 Fair value Level Valuation techniques Assets
90 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Recurring fair value measurements Other financial assets Derivative used for hedging \ 214,648 2 DCF Model Disclosed fair value Investmentproperties 1,433,599 3 DCF Model Liabilities Recurring fair value measurements Other financial liabilities Derivativeusedforhedging 11,413 2 DCF Model DCF Model, Otherderivativefinancialliability 1,973 3 Comparable Company Analysis Disclosed fair value Borrowings 7,632,086 3 DCF Model
(6) Valuation Processes for Fair Value Measurements Categorized Within Level 3
The Company uses external experts that perform the fair value measurements required for financial reporting purposes. External experts report directly to the chief financial officer (CFO), and discusses valuation processes and results with the CFO in line with the Company’s closing dates.
(7) Gains and Losses on Valuation at the Transaction Date
In the case that the Company values derivative financial instruments using inputs not based on observable market data, and the fair value calculated by the said valuation technique differs from the transaction price, then the fair value of the financial instruments is recognized as the transaction price. The difference between the fair value at initial recognition and the transaction price is deferred and amortized using a straight-line method by maturity of the financial instrument. However, in the case where inputs of the valuation techniques become observable in markets, the remaining deferred difference is immediately recognized in full as profit for the year.
91 KT Corporation Notes to the Separate Financial Statements December 31, 2017 and 2016
Changes in deferred amount for the years ended December 31, 2017 and 2016, are as follows:
(in millions of Korean won) 2017 2016 Other Other Other Other derivative derivative derivative derivative financial financial financial financial assets liabilities assets liabilities Beginning balance \ 8,470 \ - \ 11,293 \ - Increase - 7,126 - - Amortization (2,823) (594) (2,823) -
Ending balance \ 5,647 \ 6,532 \ 8,470 \ -
37. Events after Reporting Period
Subsequent to the reporting period, public bonds issued are as follow:
December 31, 2017 (in millions of Korean won) Issue date Carrying amount Interest rate Redemption date The 190-1st Public bond 2018.01.30 110,000 2.55% 2021.01.29 The 190-2nd Public bond 2018.01.30 150,000 2.75% 2023.01.30 The 190-3rd Public bond 2018.01.30 170,000 2.95% 2028.01.30 The 190-4th Public bond 2018.01.30 70,000 2.93% 2038.01.30
92 Report on Independent Accountants’ Review of Internal Accounting Control System
To the President of KT Corporation
We have reviewed the accompanying management’s report on the operations of the Internal Accounting Control System (“IACS”) of KT Corporation (the “Company”) as of December 31, 2017. The Company’s management is responsible for designing and operating IACS and for its assessment of the effectiveness of IACS. Our responsibility is to review the management’s report on the operations of the IACS and issue a report based on our review. The management’s report on the operations of the IACS of the Company states that “Based on the assessment of the IACS, the Company’s IACS has been effectively designed and is operating as of December 31, 2017, in all material respects, in accordance with the IACS Framework.”
Our review was conducted in accordance with the IACS review standards established by the Korean Institute of Certified Public Accountants. Those standards require that we plan and perform, in all material respects, the review of management’s report on the operations of the IACS to obtain a lower level of assurance than an audit. A review is to obtain an understanding of a company’s IACS and consists principally of inquiries of management and, when deemed necessary, a limited inspection of underlying documents, which is substantially less in scope than an audit.
A company’s IACS is a system to monitor and operate those policies and procedures designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the Republic of Korea. Because of its inherent limitations, IACS may not prevent or detect a material misstatement of the financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
93 Based on our review, nothing has come to our attention that causes us to believe that management’s report on the operations of the IACS, referred to above, is not presented fairly, in all material respects, in accordance with the IACS standards.
Our review is based on the Company’s IACS as of December 31, 2017, and we did not review management’s assessment of its IACS subsequent to December 31, 2017. This report has been prepared pursuant to the Acts on External Audit for Stock Companies in Korea and may not be appropriate for other purposes or for other users.
Samil PricewaterhouseCoopers March 2, 2018
94 95